Mistakes Retirees Make and How to Avoid Them

MarketWatch recently published an article, Mistakes Retirees Make and How to Avoid Them, on how to avoid the mistakes retirees often make when turning their savings into income.

Author Robert Powell interviewed Suzanne Bliven Shu, dean of faculty and research at Cornell University’s Johnson College of Business. She noted that asset managers don’t want to see retirees pulling money out of their accounts, but some may need to. She describes asset management in retirement as very individualized, based on health and longevity expectations. “A mistake for one person is not necessarily a mistake for another person,” said Shu.

But the mistakes that are being made are easily avoidable or can be corrected, she adds.

Don’t claim Social Security early

The article goes on to state that many older adults are claiming Social Security too early. “For instance, 48% of women and 42% of men who claimed retired-worker benefits in 2013 were age 62,” according to a report by the Center for Retirement Research at Boston College. The next most popular claiming age was the full retirement age (it was 65 and but in 2008 it became 66).

“It’s not always obvious which people are making a mistake,” writes Powell. Many people who claim at 62 are not evaluating how much they are giving up over the years. Much of Shu’s research is aimed at understanding why people claim early and what interventions can be made to help people make a well-considered decision about when to claim Social Security benefits and “not just jump into it because they feel like they need the money right now.”

Powell notes good news, that over the last two decades the percentage of those who claimed benefits at age 62 have seen a steady decline (briefly interrupted by the Great Recession). In 2019 just one in four claimed at 62.

In addition, the Social Security Administration revised its  statement that shows the dollar amounts retirees would receive at different ages. This new statement may help discourage people from claiming at age 62. But there is more work to be done, says Shu. “People mentally think of Social Security as like some giant 401(k) plan. ‘I’ve been paying into it and there’s some pot sitting there which is my money.’ But they neglect to evaluate what they are loosing over the years by claiming early.

Consider survivor benefits

A widow or widower who is at full retirement age or older would receive 100% of their deceased spouse’s benefit amount, but benefits taken at 62 are considerably lower than those taken at 70.

“I think a lot of times people are ignoring that and it’s a super important topic,” said Shu. She advises that people need to take into consideration the long-term impacts of their decisions. “…you’re making a decision at 62 that could still extend for another 30 years.”

Look into an annuity

While there are disadvantages to annuities and they are not the right decision for everyone, an annuity can provide that “insurance” you might be looking for. Annuities will provide an income whether monthly, quarterly or possibly for the rest of your life. “A life annuity will pay for as long as you live,” says Shu. And, she adds, they will continue to pay whereas other retirement accounts may run out under the “4% rule.”

[Editor’s note: the 4% rule suggests the total amount that a retiree should withdraw from retirement savings each year. This rule seeks to establish a steady and safe income stream that will last for 30 years or more. The payments consist primarily of interest and dividends on your savings and are designed to help meet a retiree’s current and future financial needs. However, there is a chance that the funds can run out for a very long-lived individual, for those with very high medical costs, or when funds are deleted during a severe economic downturn. They also depend on the fact that you won’t splurge and withdraw funds beyond the annual 4%.]

While annuities offer you a guarantee of never running out during your lifetime and offer other benefits, there are extras costs annuities to consider, and they are not the right decision for everyone.

You might live longer than you think – plan for it

“People often underestimate how long they might live…all the time,” said Shu. “It’s a huge uncertainty. None of us know how long we’re going to live.” You can get a sense of probability by checking out J.P. Morgan’s  2022 Guide to Retirement. A more personalized estimate can be found at Actuaries Longevity Illustrator.

Take retirement income planning seriously -- it is not easy

The article quotes Nobel laureate William Sharpe, who says the use of savings in retirement is “the nastiest, hardest problem in finance.” If this topic is hard for a Nobel laureate, Powell states, “what chance do mere mortals have in getting it right?”

Yes, it’s difficult, but he does recommend that you educate yourselves as much as possible to improve your odds of making the best decisions. Powell provides the following resources as two great places to start: the Social Security website and the Consumer Financial Protection Bureau’s website.

But remember this, cautions Shu: “Every person’s situation is unique and it’s hard to give advice that’s going to work for everyone … There’s no easy answer.”

Put the emotions of the moment aside

Putting aside your emotions is Shu’s most common advice. “Think about how life looks in 20 years under different scenarios such as claiming Social Security at age 62 and living to age 95, or claiming Social Security at age 62 and not living that long.” Do the same for waiting until 66 or 70.

She advises to think through the different stories. She feels the stories are an important part of your decision-making process because it will help separate you from the emotion of the moment and get you started in thinking about what life will feel like in the future.

Read the full article at Mistakes retirees make and how to avoid them - MarketWatch

Check out this article about unexpected sources of income during retirement: 5 Unexpected Sources of Retirement Income (msn.com)