4 Common Ways Seniors Can Wreck Their Retirement

12250493_sThe road to retirement can seem arduous at times, but a common belief among working Americans is that the hard work is over once they reach their “retirement number” — that is, the magic dollar amount they believe will allow them to retire in comfort and security.

Unfortunately, this isn’t the case. If seniors don’t carefully manage their nest eggs in retirement, they could find themselves hurting financially during their golden years, with few ways to make up for financial shortfalls. Here are four ways seniors commonly wreck their retirement.

1. Outliving their nest egg
Seniors’ biggest worry is arguably outliving their money. This fear is exacerbated by the fact that the average life expectancy of Americans has spiked from about 70 years in the mid-1960s to almost 79 years today. Early in your career, your best estimate of the income you’ll need in retirement may turn out to be vastly different from what you’ll actually need to get by when you leave the workforce for good.

The good news is that undershooting our retirement number can be a pretty straightforward problem to rectify. The key is to live within your means, which in effect means living on a budget. Your income during retirement will likely be lower than the wages you earned on the job. Formulating a workable budget allows seniors to understand their cash flow and help ensure that they don’t overspend. This might involve setting money aside into separate accounts just to ensure your spending within certain categories, such as food or entertainment, remains on track. Best of all, developing a working budget and examining your spending habits can often be done in as little as 30 minutes each month.

 

2. Being unprepared for tax implications
Unexpected tax costs can also deal a blow to retirees’ finances if they’re not prepared.

For example, 13 states tax Social Security benefits, and four of them charge the same rate as the federal government (i.e., without any income exemptions). If you happen to retire in one of these four states (Minnesota, North Dakota, Vermont, and West Virginia), you could find yourself handing back more to the federal government than you had expected. The same can be true for the taxation of retirement benefits, such as IRAs and 401(k)s, since different states can tax retirement benefit withdrawals differently and boast different exemption levels. In other words, where seniors choose to retire can definitely matter to their bottom line.

Other than gaining a full understanding of the tax policies of the state they plan to call home in retirement, seniors should have a withdrawal plan in place. A withdrawal plan is (preferably) drawn up ahead of retirement, and it determines how much you’ll take out of your retirement plan(s) each year. It’s important that seniors not only pay close attention to the amount they’re planning to live off of each year (i.e., ensuring their nest egg stretches for a long time), but also pay close attention to how their state taxes retirement income.

 

Click here to read the rest of this article.