A 2010 brief from the Employee Benefit Research Group indicates that as many as 47% of Early Baby Boomers are at risk of coming up short in their ability to pay for basic expenses from their retirement savings. As if that weren’t frightening enough, research shows that many retirees make poor financial decisions once they retire. As you might have guessed, combining minimal, at-risk savings with poor decision-making is a recipe for disaster. But how can a retiree avoid it?
A Bird in the Hand
While each retiree is an individual, and the mistakes of one individual could be the right decisions for another, some poor choices are detrimental to almost all retirees. Take annuitization and lifetime income versus lump sum payments. Many retirees would rather pay a lump sum instead of a guaranteed fixed income for life. For those who die early on in their retirement, the lump sum option ends up being a better choice-but for those who live longer than expected-or, even make it to their life expectancy-a lump sum could equal comfort and a large bank account for the present without the long-lasting impact of the money that annuitization offers.
Jumping for a lump sum is not always a good idea, whether from your annuity, defined benefit plan, or any other account with different payout options. Work with your agent to determine the best way to structure your payments for the long term.
The Long and the Short of It
Investing goals can take many forms, but they are often lumped into either long- or short-term goals. Many retirees forget that they should invest for both the long- and the short-term and instead invest with only one or the other in mind. Instead of creating an annuity ladder with varying annualization, they choose one deferred annuity, which locks them out of their money (unless they want to pay the penalty) and hurts their lifestyle during the short term, or they opt for an immediate annuity which has less time to grow and accumulate and restricts their earnings so that they outlive their savings. Similarly, some retirees choose underlying investments that work better for the long- or short-term, but few for both.
Instead of thinking of just long- or short-term goals, ask your agent to help you create a plan that allows you to live comfortably now while saving money for later.
Short-Term Market Memory
Another drawback is when retirees decide based on only the market’s long- or short-term history. When choosing subaccounts for an annuity, life insurance policy, or investments within your IRA, you must consider the long-term history of the market as well as adjust for the short-term environment-but. It would be best if you did not make your decisions based solely on one or the other.
It is challenging to balance your current needs with your future expectations, and the uncertainty of your life expectancy adds another complexity to the battle to make retirement savings last. Walking the fence between overly conservative action and wasteful risks is challenging, and it’s one that many people get wrong. Please consult a professional for objective advice to help you balance your goals and enjoy your retirement without cutting it short.
Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges, and, if taken before age 59 1вЃ “2, may be subject to a 10% federal income tax penalty.
Guarantees and lifetime income payments are contingent on the claims-paying ability of the issuing insurance company.