Mistakes that Clients Make While Saving for Retirement
The path leading up to retirement is an exciting time for any client, but even the savviest people are prone to human error—financial advisors see it all the time, many times people miscalculate or overlook crucial components when it comes to retirement planning. The scary thing is that the closer clients get to retirement age, the more harmful any errors or omissions are to your client’s retirement plans. Here are some of the common pitfalls that clients get tripped up on:
Having no Social Security strategy. A common mistake made by clients (and some financial planners) is not devising a strategy before it comes time to draw down on Social Security benefits. Clients are overly optimistic at times, thinking that they will live past the breakeven age and wait as long as possible to start drawing Social Security benefits. But in general, the breakeven age for these benefits is in the low 80’s. Sure, your clients will enjoy more dollars over their longer lives, but if their health is questionable, clients should claim benefits earlier on.
For clients who are married, they need to factor in the age of both spouses, the expected lifespan, and respective work histories to figure out when to begin claiming benefits. Get both spouses involved by creating an account with the SSA—get them to claim ownership and get involved.
Investing too conservatively, too early. For clients in pre-retirement, they often make the mistake of shying away from risky asset classes too early in the acquisition phase. Depending on when clients are planning on retiring, they could live another 20 or 30 years. That’s quite a long time, and behavioral science shows that the average response is to attempt to secure cash flow and the value of their portfolios as much as possible, as quickly as possible.
The majority of people assume they need to invest a big chunk of their portfolio into lower-yielding investments to protect their money, but they often forget the bright side of investing risk: inflation creep. An adequate amount in growth assets will allow the client to protect their retirement assets and the purchasing power of funds from the effect of inflation.
Skipping long-term care insurance. When considering the cost of out of pocket long-term care, keep clients informed. Living in a nursing home can cost more than $80,000/year on average. This can drain your client’s nest egg quickly. Even assisted living can cost several thousand dollars a month.
When purchasing long-term care insurance, the sweet spot for the highest benefits on premiums paid is 53/54 years old. If your clients are in pre-retirement and above that age, they haven’t missed the boat entirely, but there is a dwindling window of opportunity to procure an affordable policy.