The abundance of investment options that are available to us as we plan for a financially secure retirement can be daunting. Some retirees take too much risk and fail to plan for longevity.
Here we look at the biggest mistakes retirees make, and how you can avoid them.
Taking too much investment risk
Many retirees overestimate their investment acumen, or they fail to make adjustments to 401(k)s and other retirement accounts as they approach retirement. Either way, the result is often an overexposure to risky stocks and stock mutual funds, concentrated positions in their employer’s stock, or insufficient diversification.
Solution: To avoid overexposure, you may want to consider rebalancing your portfolio every so often. Sell winners and buy unloved but promising assets when they’re cheap, and stay diversified among many different types of investments.
Consider a prudent allocation to guaranteed assets such as guaranteed investment contracts, annuities and whole life or universal life insurance.
Failing to plan for long-term care costs
Failing to plan for the costs of assisted living, nursing home and other forms of long-term care is all too common. The average cost of a semi-private room in a nursing home in 2018 is $7,441 per month, according to the “Genworth Cost of Care Survey.”
Solution: Consider purchasing long-term care insurance – with a potential benefit equal to your net worth if you can afford it. If you use a qualified long-term care insurance policy and your state allows it, this may help protect your assets from being seized under a Medicaid Asset Recovery program.
You may also consider a single-premium life insurance policy that also comes with a long-term care benefit.
Thinking that Medicare covers everything
Medicare is an important safety net – but there are large gaps in the coverage that frequently catch beneficiaries unprepared.
For example, as noted above, Medicare does not generally pay for long-term care. It also doesn’t cover prescription drugs, unless you enroll in Medicare Part D or a Part C (Medicare Advantage) plan that includes drug coverage. It doesn’t come with basic Medicare Part A and B.
Solution: If you can’t afford a significant financial shock from an unexpected medical expense, you may want to purchase Medicare supplement insurance (Medigap) or a Medicare Advantage plan that helps fill the coverage gaps in basic Medicare Parts A and B.
Failing to plan for a long life
Americans are living longer and longer into retirement. This creates a strain on retirement accounts and increases the risk of outliving one’s retirement assets.
No stock or mutual fund can promise a monthly income you can never outlive.
Solution: Lifetime annuities, which provide a guaranteed income for life no matter how long you live, may be an important part of an individual retirement plan. If you are concerned about outliving your retirement nest egg, you should consider allocating a portion of your assets to an annuity large enough to cover your basic expenses.