By Deacon Frank Reilly
SAN DIEGO — After decades of hard work, the prospect of retirement can be exciting. Once retired, you will finally have more time to spend with family, volunteer at your favorite charity, travel, work on your golf game, or simply relax. However, retirement can also bring with it several financial pitfalls.
Below are four major pitfalls you may face as well as helpful tips for successfully navigating them.
Because Medicare eligibility begins at age 65, retiring earlier means you may face a gap in coverage. Then once you reach age 65, delaying Medicare enrollment can result in a permanent premium increase. Original Medicare, known as parts A and B, offers basic healthcare coverage but may not meet all your needs.
If retiring before age 65, have a plan to obtain healthcare coverage until then through either the private or public market. Once approaching age 65, start the Medicare enrollment process as soon as possible (three months ahead of time) to ensure you don’t experience coverage gaps or penalties. Consider consulting with a Medicare specialist to review your situation and supplemental coverage options.
Taking Social Security before your full retirement age (age 66–67, depending on year of birth) results in a permanent reduction in monthly benefits.
Benefits increase by approximately 8% each year you delay Social Security past the federal Retirement Age (FRA) until reaching a maximum benefit at age 70. If you or your spouse has an above-average life expectancy, depending on your personal situation, it may be optimal to delay taking Social Security to maximize lifetime benefits.
Retirement Account Withdrawals
You may hold traditional IRAs, Roth IRAs, and taxable brokerage accounts, and it can be confusing deciding which accounts to pull funds from. It may be enticing to withdraw Roth IRA funds first to meet your living expense needs, as these distributions will typically be tax-free.
Particularly before you start receiving Social Security benefits and taking required minimum distributions from traditional IRAs at age 72, your tax rate may be relatively low. Thus, it may be more sensible to allow your Roth IRA to grow while withdrawing funds from traditional IRAs (taxable as ordinary income) or taxable brokerage accounts (which may be subject to capital gains taxes once sold). It may even make sense to implement a Roth conversion, which moves funds from your traditional IRA to your Roth IRA. A conversion is taxable as ordinary income in the year it is made, but the Roth IRA funds then grow tax-free.
Not Making a Plan
Perhaps the single worst retirement mistake is not making a plan. Failure to plan could allow you to misallocate resources or — at worst — cause you to run out of money entirely.
It’s vitally important to create and periodically update a financial plan to clearly identify your goals, financial resources, and key risks. From there, you can develop a path toward reaching those goals, better managing any risk that may arise. With a well-prepared financial plan in place, you may even discover you can accomplish more than you previously thought!
Deacon Frank Reilly is president of Reilly Financial Advisors . This material is for informational purposes only and should not be construed as legal, tax, or financial advice. For more information, please visit www.rfadvisors.com/disclosures.