In this episode of the Just Don't Lose The Money Radio Show, Sam and John discussed 10 mistakes that people might make in retirement (and how you could avoid them.) You'll wan't to listen to the episode to hear what they have to say, but we transcribed the first five mistakes from the show below so you can follow along!
1 - Claiming Social Security Too Early
Sam - We see a lot of times people come in and they say to us, hey, I turned 62. I'm going to grab it when I can because I'm reading how security is going to run out, are they going to reduce my benefits? And sometimes they make mistakes, because they're claiming it too early when they don't need it. And they could have letting it sit there and continue to grow and increase that payment by 8% a year. I mean, what are your thoughts on that, john?
John - Yeah, people come in Sam, and they say, "I'm 62 I want to start collecting that now. That's MY benefit and I want it, I don't trust the government. I don't think it's going to be there down the road road for me." So they're so quick want to maybe start taking that benefit. But they haven't walked through the process of what is the effect of taking it to so early.
Sam - Exactly, exactly. And you know, one of the things I think people just, you know, the news, right, it's all over the news. And just about six months ago, the Social Security Administration came out with a new study in the trustee say, Hey, you know what, we might be in trouble calm. I think it was 2035. For a while they said it was 2034. So they've kicked the can down the road front on the year. But social security, for a lot of people listening, may not realize it's been around for a long time. In fact, it was started in August of 1935. But life was different back then. People didn't live as long as people live now. There was a lot more people working, putting money into the system for every one person leaving. Well, today, that's that's been cut way down. It's upside down. So it's not like they're trying to cheat us this, it's that the IOU is getting bigger and bigger. So people just sometimes are very quick to take their benefit when they don't need it. And they take it early. And it might not be the best thing to do.
2 - Continuing to work after getting Social Security
Sam - Let's use the example that we used earlier, I'm 62, I'm due this benefit, I'm going to grab it, but I'm still working full time. So, that actually can actually really hurt you. There's something called the provisional income. JOHN and I, we talk about it all the time with our clients. But a lot of people say, Well, what is that? Provisional income formula is what the government uses to see if your Social Security benefits is going to be taxable or not.
So let's just use an example. Let's say you're 60-something years old, you started collecting Social Security, and it's $30,000 a year. But you have maybe a part time job, maybe you're making $30,000 a year on your own, so that now provisional income comes into play, you take that 30,000 that you're making going to work every day, and then you take 50% of your Social Security benefits. So 50% of 30 is 15. Yeah, those add together to $45,000. Well, it doesn't sound like a lot, but that's $1,000 over the threshold for a married couple filing jointly. And what that would actually do, it would make that $30,000 Social Security benefit, which should be completely tax free, It will now make 85% of that number taxable.
Wow. So when you don't need it, or if you think do, and you think it's like free money? Well, it isn't is it?
John - It's money that you're getting, but now you're paying taxes on it, you're probably turning around and - how often do we see this? You put in the bank and just you know, earning nothing, when you could have just left it in your social security account. And that withdrawal benefit you are getting now would have been growing to increase by 8% a year all the way up to age 70. So part of the problem, this sort of little mistake that a lot of times people often make is they don't take into consideration in the bigger picture. I'm working, I want what's coming to me, but they don't test to make sure that it's the right time, or, not the wrong time to have taken that.
That's part of our process, let's say you do need some income, and that you want to turn on social security because you need that income, we take taxation into consideration. Sam, you just talked about the provisional income and so forth, we'll look and talk about where we think interest rates or tax brackets are going to be down the road, it might make sense for an individual to maybe make withdrawals from their IRAs, at a lower tax bracket today versus maybe 5-10 years down the road, which will allow the individual to hold off on social security and allow that Social Security benefit to grow by 8%.
3 - Being way too conservative with investments
Sam - Just the other day, we saw a woman, she's actually not retired, she's maybe eight to ten years away from retirement. So she switched jobs about three years ago. And she had about $620,000 in a 401k when she made the switch. So she came in and says, "I feel like the the bond is going to fall out. It's we've been on a run. And my parents told me that all the stories about when they lost a bunch of money. So I'm really petrified and I have all my money in this 401k actually not all of it, but like 90% of it sitting in a money market."
So think about that. She's had 500 and something thousand dollars sitting in a money market for three years, when in fact, the markets been doing quite well. Yeah, so that's probably an example of being overcautious, and not necessarily just doing the right thing. But if you make decisions out of emotions, and then you look back, and that could really hurt you. We're going to put that in to consideration, John, we always talk about that in our plans - (plus) inflation, taxes, which means you need your money to grow.
John - Exactly. And some people might become too conservative way too early, because they're unaware of where they are, I can't stress enough about having a plan. So if you think you're okay, you might move more money into bonds or fixed income type instruments, and not take advantage of the future growth. And you might not be earning enough to get to where you want to get to. Understanding and having a plan in place and working that plan gives us the idea of when you should become right. At the right time, not too soon.
4 - Being way too aggressive with investments
John - So when I sit down with people, part of my process is that I show them what they have. And part of that is going through with them a Morning Star analysis, some other investment tools that we use, but we'll show them what their standard deviation is, what standard deviation really is, is the measure of risk that you're taking with that kind of portfolio. Oftentimes people say, yeah, I think I'm a moderate, aggressive investor.
I hear that a lot. "I'm kind of between moderate, but not as aggressive. So I'm kind of in between." And then we look at all the positions, we go through the the analysis and then we show them that no, you're aggressive. And sometimes the light goes off, and they're surprised by it. Sometimes it's just by not rebalancing their portfolio over time, then when we go through with them as we show them different alphas and betas. And that tells us - Are you being rewarded for that risk? I don't mind taking risk, if I'm going to get rewarded for it. But I don't want to take on too much risk that I don't need precisely. And I don't want to take on risk and not get the reward that I should get.
5 - Over Exposure To One Stock Or Asset Class
John - I can use my father as an example. He worked for the same company for 47 years, he passed away a year and a half ago. But you know, his biggest risk was he worked for that one company forever. And he just constantly bought the company stock. It worked out for him. But his biggest risk was working for that company. If all of a sudden the company has some problems, like Enron, or other dot-coms, and he lost his job, or the company had problems, all of a sudden the 401k stock or the value of the stock will go down. He doesn't have a job. He's overexposed in that one company. You know, he was lucky. I don't want to rely on being lucky in retirement. But he was lucky.
Sam - That happens a lot, you see people just to John's point, they work for the same company. But yeah, I go back to when we first started the business, almost 30 years ago - we had a really great guy, he was the president of the Polaroid Retirees Association. So we did a good job for him. He brought in a bunch of clients for us. And there's a perfect example of a company that did really, really well back in the day. There was you know, Polaroid, they own that camera space, instant camera instant pictures.
But guess what happened to Polaroid? Yeah, we have so many people that we've worked with that have really gotten bit because they would just would not diversify over exposure - one stock and one asset class. So that's a problem, you should be aware of that. And that's why we are able to sit down with people and sort of point those things out to them.
Listen to the episode to discover the other five mistakes!