Groundhog Day: 7 mistakes retirees make repeatedly

[February 02, 2012]  CHICAGO (AP) -- Despite the best of intentions, retirees tend to make the same money mistakes over and over and over again.

Repeating the same scenario isn't all unpleasant, as Bill Murray discovered while endlessly reliving Groundhog Day in Punxsutawney, Pa. You can learn to play the piano, speak French, ice sculpt, go out to a lot of nice dinners, and more.

But eventually you're going to run into trouble if you don't break the pattern of financial neglect. The money simply may not hold up in the long run.

It's time to wake up and address your errors before you get stuck in your own bad-money time warp.

A discussion of seven common retiree mistakes and how to avoid them:

1. Being too conservative with money.

Treasury bonds, certificates of deposit and other savings instruments with scant yields can give retirees a false sense of security. They guarantee some income, however small, and can provide soothing protection from dizzying stock market volatility. But they don't provide even a fighting chance to keep up with inflation in the long term.

Most financial planners say the safer move for the long haul is to devote a healthy portion of your portfolio to stocks.

"Retirees tend to be too willing to sacrifice future safety for incremental yields today," says Bob Wiedemer, managing director of Absolute Investment Management in Bethesda, Md.

Inflation's impact is real, and ravaging over time. To illustrate its effect to his clients, financial adviser Allan Flader of RBC Wealth Management in Phoenix reminds them of the change in the price of a stamp over the past three decades -- the length of many retirements nowadays. The cost of mailing a letter has gone from 18 cents in 1981 to 34 cents a decade ago to 45 cents today.

FIX: A rough guideline for asset allocation is to own a percentage in stocks equal to 110 or 120 minus your age. In other words, a 70-year-old would have 40 or 50 percent of her investment portfolio in stocks.

2. Putting off planning.

Failing to create a financial or estate plan isn't just a matter of missing out on investment opportunities or tax advantages. It can get you in trouble later in retirement when you're no longer at the top of your game mentally.

About half the population over 80 suffers from significant cognitive impairment. And a decline in financial and investing skills can start much earlier.

Without guidance or a plan, elderly investors can harm their finances through unwise decisions.

FIX: Prepare thorough financial and estate plans and discuss future aging-related scenarios with an adviser.

3. Bailing out the kids.

It's possible to be too selfless and charitable in retirement if it means putting your own financial security at risk.

Financial advisers cite many instances of overly generous retirees.

Some seniors contribute to down payments for their children's first homes even though they're struggling to fund their own retirements. Others stretch to pay for the college expenses of a child or grandchild. One of the oldest maxims of financial planning bears repeating: You can take out loans for college but you can't take out a loan to pay for your retirement.

Kelley Long, a personal finance expert with the National CPA Financial Literacy Commission says too many retirees are overly concerned about leaving a legacy "when in fact their children would trade their inheritance for the knowledge that their parents were living out their days in comfort."

FIX: Put your financial needs in retirement first. Make sure you know how much you can safely spend from your savings each year.

4. Paying too much in taxes.

Retirees usually are in lower tax brackets than in their working years. But they often fail to make adjustments that could lower their taxes.

Putting off taking withdrawals from an individual retirement account until they are required at age 70 1/2 also can be costly. That's because such amounts are taxable and often bump retirees into a higher tax bracket. A plan of gradual withdrawals starting in your 60s can be a more effective strategy.

Seniors who do regular volunteer work tend to leave tax deductions for mileage and out-of-pocket costs on the table. And snowbirds who spend months in the Sunbelt often don't know they could save thousands of dollars by changing their legal residency to a state with a smaller or even no income tax, as with Florida. For example, if you own a home in Minnesota but spend 183 days a year out of state you can switch, assuming you meet the other state's minimum residency requirement.

"For people who are already spending significant time elsewhere, it can be a big savings," says David Levi, a tax director with tax consultancy CBIZ MHM in Minneapolis.

FIX: Have a plan to minimize the tax impact of withdrawals, keep your receipts for volunteering costs, don't miss out on any deductions.

5. Following financial advice from friends and family.

Many seniors living on fixed income wouldn't consider paying a planner to help organize their finances. But enlisting a financial professional can pay off in the long run.

Julia Valentine, a financial adviser in New York City, hears it over and over when she gives seminars at nursing homes: Retirees rely on families for advice about buying or selling homes, estate planning, wills. One client even bought a house in Florida as an investment property on the advice of her manicurist, then couldn't find a renter.

Stocks, bonds, budgeting, IRAs, insurance -- seniors routinely act on guidance from their friends and family. Not only is that risky, the willingness to follow off-the-cuff advice increases their vulnerability to financial scams targeting the elderly.

FIX: Validate any advice from friends and family with objective materials from somewhere else. If not an adviser, that means at least credible online resources or organizations, notes Jean Setzfand, director of financial security for AARP.

6. Underestimating the costs of health care.

The ability to pay for health care is an increasingly critical part of retirement income security. What was once referred to as the three-legged stool of retirement security -- with legs for pension, savings and Social Security -- now effectively needs a fourth pillar in health care savings.

A typical 65-year-old couple retiring now needs roughly $230,000 to cover medical expenses in retirement, not counting long-term care, according to Fidelity Investments. But surveys repeatedly show that most people don't have a plan to cover those costs. They don't realize that long-term care and many other costs associated with health care fall outside Medicare coverage.

FIX: Buy Medigap supplemental insurance that fills in benefit gaps in traditional Medicare. And strongly consider buying long-term care insurance, which pays for in-home care and nursing home care, unless your health or age make it unaffordable. It can help ensure that significant medical expenses later in retirement don't wipe out your assets.

7. Underestimating how long they'll live.

This may be retirees' biggest mistake of all. With all the advances in medical technology, life expectancy is growing faster than ever before.

The downside is most seniors don't have nearly enough savings or income to stretch over a retirement that could last 30 years or more. Old age is now the longest stage in life. What's more, they couldn't imagine planning for it.

"It happens all the time that a 65-year-old couple come in and think they only need a nest egg for 10 years," says Flader, the financial adviser in Phoenix.

In fact, there's a 63 percent chance that at least one member of a 65-year-old couple will live to 90 or older, according to the Society of Actuaries.

FIX: Ideally, financial preparation for a long life starts during your work career with the creation of a financial plan that will provide income deep into retirement. Failing that, working past your anticipated retirement age, even part-time, will allow your existing savings additional time to grow.

[Associated Press; By DAVE CARPENTER]

Personal Finance Writer Dave Carpenter can be reached at http://twitter.com/scribblerdave.

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