10 Common Mistakes Pre-Retirees Make

By Hightower Westchester on April 5, 2021

For many of us, retirement is something we spend most of our lives working towards, yet it still seems so far off in the future.  Despite how far-off it may or may not be, you’ll want to make sure you’re doing things that are going to prepare you for a successful retirement.  As with anything, there will be mistakes made along the way, but it’s important to recognize these mistakes well before you retire and find an immediate solution to right your course.

Below are 10 mistakes that pre-retirees make that, if avoided, will make for a much more enjoyable retirement.

1. Not Having A Financial Plan: Having a roadmap to help in the pre-retirement process is one of the most important initial steps. As mundane as this process may seem, it doesn’t have to be, and we encourage clients to make it fun and aspirational. The financial plan is the blueprint for achieving your goals and will help make sure you’re staying on track to do so.  Having a financial plan will help you understand how much you’ll need in order to retire comfortably and do the things you want to do.  The earlier you create your financial plan, the more time you’ll have to adjust your saving and investing strategies to reach your goals so you can then enjoy the benefits in retirement.
2. Not Saving Early Enough: Having young children, one of the things we try to instill in them is the importance of saving, starting now.  The earlier you save, the longer you have for your money to grow thanks to compounding interest.  It’s important for all of us to understand that saving for the future creates independence.  Having the longer-term vision and ability to understand the value of compounding over time is very powerful.  As a financial advisor, one of the important exercises we go through with clients is demonstrating what savings in retirement accounts can grow to over a period of time.  For many, retirement savings along with social security are the main income generating vehicles so knowing how much you’ll need to save, well before you get to retirement, is invaluable.
3. Not Having a Budget or Tracking Expenses: I can’t emphasize enough the importance of having a budget and understanding what your expenses are.  If you don’t know where your money is being spent, it can be a rude awakening when you realize how much income you’ll need to generate in retirement to sustain your lifestyle. Having a budget and tracking expenses will allow you to have a better understanding of your finances as you start approaching retirement. Don’t know where to start?  Read our blog “Help! How Do I Create a Budget?”
4. Have the right team in place: When most of us first start out in the workforce, our situation is not overly complex.  But as you build wealth your circumstances get increasingly more complicated.  Having the right accountant, attorney, and wealth advisor in place to help you through every phase of your financial life is a must. Many of us try to play these roles but unfortunately the longer-term potential damage is difficult to unwind so it’s better to let the professionals do what they do best.
5. Failing to Realize a Sense of Purpose in Retirement: As a pre-retiree, it’s important to consider how you’d like to spend your time as a retiree.  For many of us, our identity is tied to our work and everything that comes with that…colleagues, client relationships, office environment, etc.  It’s very difficult to give up 40+ years of your life and then turn the chapter not knowing what that next stage is going to look like.  Part of your retirement planning process should include doing some soul searching to figure out what’s meaningful to you and what will give you a sense of fulfillment.  Read our blog “Are you Ready for Retirement? It’s Not Just About Your Finances” for more on this topic.
6. Not Reevaluating your Investment Portfolio: One common mistake we find is that individuals tend to keep their allocations consistent, which means having the same risk at 60 as they did when they were 25 years old.  We are big proponents of diversification and more importantly understanding your risk tolerance.  Your financial landscape will change as you go through different phases of your financial life and sometimes understanding the downside risk is more important than the potential upside.  We recommend reviewing your allocations regularly to make sure they are aligned with your goals.
7. Trying to time the market or sitting in cash: : One constant in the world of investing is that in the short term, it is very difficult to predict the outcome of the markets.  When we start a relationship with a new client we always communicate to them that we will never fully go to cash.  Trying to time the market is a mistake that we see many pre-retirees make and the outcome is they lose potential upside or sit in cash for a long time.  Regardless of how smart you are or how much research you do, it is very difficult to be right about when to buy, sell, and buy back.  Our philosophy is to understand your risk and stay the course.
8. Using Retirement Funds for College: The one cost that keeps rising every year is the cost of college.  Helping our children pay for this large liability is something we all want to do, but doing so could delay retirement which, the majority of the time, is not the best solution. Our advice is to find a balance between saving for retirement and contributing to a 529 plan for your kids (Read “What Do I Do? Save for Retirement of College Funding?”).  If there’s a shortfall when the time comes to send your child off to college, you can try to pay the difference out of your earnings.  Or you could always have them apply for scholarships, grants, financial aid, take out low-interest student loans, and/or work while attending college.  In our opinion, 529 plans are one of the best ways to save for college. Read “How to Get a Four-Year Education for the Price of Two” for more information.
9. Underestimating Life Expectancy: One thing we know is that people are living a lot longer than previous generations. With increased life expectancy comes longer retirements. These days, it is not uncommon to see people spend 30+ years in retirement.  Some people may spend just as many years in retirement as they did in the work force.  Knowing this as a pre-retiree gives you the opportunity to plan.  We recommend taking time to carefully consider how to fund your retirement, as well as factoring in things such as health care and having an HSA, and Long-Term Care Insurance.
10. Tax Efficient Strategy: One area that is very difficult to quantify is what your tax bracket will look like in retirement, not to mention what the federal and state tax brackets will look like. To hedge some of this risk we ask our pre-retirees to think about saving in three buckets.  One is your personal nonretirement investment money.  The other is something pretax such as an IRA or 401k plan.  The last is something that will not be taxed such as a Roth IRA.  Having these buckets allows us to mitigate some of the tax risk.

Preparing for retirement takes time, careful consideration, and patience.  There are a lot of decisions to be made now that will impact you later but being proactive and avoiding these commonly made mistakes will serve you well and hopefully lead to a comfortable and fulfilled retirement.

Roman Ciosek – Managing Director, Partner – Hightower Westchester

914.825.8633 – rciosek@hightoweradvisors.com