5 Common Retirement Planning Mistakes

Retired couple riding bicycles on a hill

By Beth Schanou, JD, CExP, Senior Wealth Planner

All of us have had a flat tire on our bikes growing up. One of the great tricks for repairing the tire was to submerge the inner tube in water to see where the bubbles came from. Then you could find the leaks and patch accordingly.

Your retirement income plan may be sending up bubbles, too, whether around Social Security, retirement account distributions, taxes or somewhere else – and these holes need to be patched up right away.

So, to help your retirement plan be more airtight, let’s look at a few of the common leaks.

1.   Taking Social Security Benefits Too Soon

Taking benefits too soon can be costly over the long-term. A worker will receive 100% of the benefit when claiming at full retirement age, but the benefit is reduced by as much as 30% when benefits begin earlier. Likewise, spousal benefits are also reduced when applying prior to the spouse’s full retirement age.

Alternatively, delaying application for benefits until after full retirement age (to as late as age 70) increases a worker’s retirement benefit with the delayed retirement credit.

Besides taking benefits too soon, another costly decision is not coordinating application among spouses. Rather than looking at each person’s benefit individually, the benefit for the entire household should be considered to potentially maximize lifetime and survivor benefits.

2.   Not Planning for Required Minimum Distributions (RMDs)

Many workers spend the better part of their earning years contributing to retirement plans to build a nest egg for use during retirement. Although many workers will need to begin withdrawals from their retirement accounts shortly after retirement, some workers can afford to delay distributions until later.

Distributions cannot be delayed indefinitely, though. Once the required beginning date is reached, a minimum distribution amount must be taken annually – which can result in a jump in taxable income. The worker may distribute more than the minimum required and may wish to take distributions before tax laws require it.

Understand ahead of time the impact of RMDs, including the timing, in combination with other expected taxable income.  Doing so will provide the opportunity to design a more strategic approach in distribution decisions and potentially reduce income taxes over the long term.

3.   Not Being Proactive with Income Tax Planning 

Most taxpayers learn their tax bill or refund only after completing their annual tax return. Some are more proactive and make an effort to reduce their overall tax liability by increasing charitable giving, harvesting capital losses or other methods.

Having the mindset that tax planning can only occur for the current tax year is limiting, though. Consider having a longer-term focus spanning across multiple tax years. Instead of looking at tax liability as starting January 1 and ending December 31, stretch the time horizon to include multiple years. Paying a little more tax now might result in a smaller total tax bill over a time horizon of several years. At times, planning across multiple generations should also be considered.

4.   Not Getting the Full Benefit of Charitable Giving

Both the giver and the receiver of a charitable gift benefit from the transaction. The recipient (i.e. the charity) receives a gift of some value. The giver can feel a sense of satisfaction while potentially reducing their income tax liability through a charitable income tax deduction.

But not all gifts lead to tax savings. Under current income tax rules, a taxpayer must itemize deductions in order to receive a charitable deduction. Depending on the amount of total itemized deductions in relation to the standard deduction, it’s possible you aren’t benefitting from the entire gift to charity.

Some of the methods which tend to maximize tax savings from charitable gifts include donating non-cash assets, such as appreciated securities, and grouping several years’ worth of charitable giving into a single tax year, possibly through a Donor Advised Fund (DAF). The contribution to the DAF is a charitable gift and distribution to the ultimate charity may be delayed for years.

Taxpayers receiving RMDs may also consider directing their RMD directly to a charity in what’s referred to as a Qualified Charitable Distribution (QCD). Instead of having the check payable to you or directly deposited to your bank account, a check would be issued to the charity(ies) of your choice.  If properly done, the QCD will satisfy your RMD without increasing your taxable income. The distribution is tax neutral because you also don’t receive a charitable deduction, but again, the distribution was not a tax event for you in the first place.

5.   Underestimating Costs 

Finally, the cost to maintain the same standard of living gets more expensive over time due to inflation’s impact in increasing the costs of goods and services. Continuing to grow your resources during retirement is necessary.

If you assume spending will decrease in retirement, that may lead to problems. The daily commute might be traded for an increase in leisure travel. Group medical insurance will go away and there may be a period of time when health insurance coverage needs to be secured individually with a personal policy for your household. Even once you’re on Medicare, there are costs there too. Health care usage tends to increase with advanced age as well.

Is Your Plan Airtight?

When you have a leak in a tire, the first step is to find it. Same can be said for your retirement income plan.

Protecting and optimizing what you have are the watchwords for retirement income planning strategies. This isn’t the time to gamble, but to conserve and grow slowly so you’re free to fully enjoy the journey.

Need someone to help you check for leaks?
Contact us today for a complimentary consultation with one of our financial advisors. 

This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.

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