Frequently Made Retirement and Estate Planning Mistakes

publication date: May 31, 2010


When putting together your retirement and estate plans, you have many steps to take. No one's plan is the same; everyone's has unique elements. The details of plans are changing as folks live longer and are more active. Even so, many people make similar planning mistakes; these mistakes may mean the difference between a satisfying retirement and an unsatisfying one. You can discover some important lessons from other people's mistakes.

Although some information about retirement and estate planning is easy to find, other information isn't - and most of the mistakes people make result from wrong assumptions or misinformation. In addition, some elements of financial planning involve as much art as science. Sometimes the intuitive answer isn't always the best answer.

Here are the recurring mistakes I've seen over the years. Correcting these actions won't make for a complete financial plan. But when you avoid these mistakes, you'll be a long way down the road to a satisfying retirement.

Not Having at Least a Basic Financial Plan

Many studies of retirees have been conducted. These studies often contain interesting information, but one fact comes out over and over again: Despite the differences in retirees and what they did in retirement, the retirees most likely to be satisfied in their golden years were those who were financially prepared.

Being financially prepared doesn't mean being wealthy. It does, however, mean doing some planning and saving early on. Those who did some amount of planning, especially those who saved for retirement for the longest periods, tend to be those who were the most satisfied in retirement regardless of their net worth.

Retirement seems to be more satisfying for retirees who limit their financial surprises. Those who go into retirement with a decent idea of how much money they're able to spend in retirement and how long their assets will last - and then adjust their expected lifestyle accordingly - aren't likely to be disappointed. On the other hand, those who enter retirement without aligning their expectations with their finances are likely to face unpleasant surprises and be dissatisfied.

Procrastinating About Estate Planning

Thanks to higher limits on the amount exempt from taxation, fewer estates pay federal estate taxes than a decade ago. That doesn't mean it's safe for you to forego having an estate plan, however. You have plenty more to plan for than just federal taxes. And you don't have to be rich to benefit from an estate plan either. A good estate plan is important for everyone because it:

  • Helps you avoid probate: The probate process in your state may be expensive and time-consuming. If so, you would do your heirs a great favor by setting up your estate to avoid the process, such as by putting most of your assets in a revocable living trust.
  • Determines who inherits your assets: Without a will or living trust, state law makes this determination for you. The division of your estate is likely to be different, perhaps significantly so, from what you would prefer. Many states, for example, give a quarter to a third of the estate to your children, even if your spouse survives you.
  • Lets you decide whether your assets are received outright or through a trust.
  • Helps you reduce or avoid estate or inheritance taxes: In states that have estate or inheritance taxes, the taxes often are imposed at much lower levels than the federal tax. State-level taxes could take a significant part of even modest estates. You may need to plan to lower or avoid these taxes.
  • Includes tools that may come into play during your lifetime: A good estate plan includes such tools as a financial power of attorney, which ensures someone can pay your bills and manage your assets when you can't. The plan also should include health care documents - such as a living will and a medical power of attorney - that name others you trust to make medical decisions when you can't. Without these documents, actions generally can't be taken without your family going to court and having someone appointed to make the decisions. That process costs time and money and could result in decisions being made by someone you wouldn't have chosen.

Underestimating Life Expectancy

A few decades ago, the average retirement didn't last long. A person retired at 65 and, on average, died around age 70. Since then, life expectancy has increased while the average age at retirement has decreased. What many people don't realize is that each year you stay alive your life expectancy increases. At your birth your life expectancy may have been, say, 73. But once you made it to young adulthood, your life expectancy increased to the late 70s.

So, getting your life expectancy right is important because your savings must last at least the rest of your life. If you don't understand life expectancy, you can have serious problems when you plan portfolio withdrawals for a 20-year retirement and then experience a 30-year retirement.

For men age 65 today, life expectancy is about 85. That means about half will live to 85 or beyond. A number of them will live past 90. Should all of today's 65-year-olds base their retirement plans on a life expectancy of 85, half of them will have underestimated their life spans and be at risk of running out of money.

Married couples should plan on at least one spouse living to age 90 or 95. Those aged 80 and older are the fastest-growing demographic group. As an example, consider a married couple in which both people are age 62 today. There's a 95 percent chance at least one of them will live to age 75, and a 65 percent chance at least one will live to age 85, according to the Center for Retirement Research at Boston University. There's a 40 percent chance at least one spouse will live to 90, and a 15 percent chance one will live to 95 or older.

Remember: A retirement of 20 years will be routine for those retiring in their early to mid 60s today. A significant number will be retired for 30 years and longer. Some may even spend more time in retirement than they did working.

Miscalculating Inflation

Inflation is a slow, steady destroyer of wealth, and too many folks overlook its effects on their retirement plans. During their working years, most people receive regular salary increases that keep pace with inflation, and sometimes they're promoted or switch jobs so that their incomes increase faster than inflation.

All that ends with retirement. Too often, folks estimate their living expenses in the first year of retirement and conclude that their portfolios can support that level of spending for their life expectancies. They overlook how inflation will eat away the purchasing power of that income. They will have to increase the withdrawals from their savings over time to maintain their standard of living. You may not need to increase your amount of spending each year - some items will rise in price while others fall each year - but over time prices overall are likely to rise.

The value of each dollar of your income declines more each year even with low inflation. A little time with a calculator or spreadsheet reveals how the combination of inflation and longer life expectancies can cripple a retirement plan, even when inflation is relatively low.

For example, at an inflation rate of just 2 percent annually, after 10 years you need more than $12,200 to have the purchasing power that $10,000 had at the start. After 15 years, you need about $13,500 of withdrawals for the purchasing power of $10,000 you spent at the start of retirement. Twenty years raises the equivalent withdrawal need to $14,850. These numbers reveal only the effects of the reduced purchasing power of the dollar resulting from inflation. Increased withdrawals also may be needed because of new expenses, such as higher spending on medical care.

To some extent, you can compensate for higher prices by cutting back and making substitutions. You can drive a less expensive car or eat fewer restaurant meals and travel less, for example. And if oil prices soar as they did in 2007-2008, you can choose the least expensive modes of transportation for traveling or postpone trips a year or two until prices drop back down. But some of these acts reduce your standard of living, and you can cut only so much.

Believing You'll Retire When You Expected To

Retirement has a lot of uncertainty, but one thing most people think they have control over is when, and even if, they'll retire. Some people have a certain age in mind for retirement. Others say they'll retire when they feel like it or are tired of their jobs. Still others say they'll never retire or will shift to part-time work before completely retiring.

The truth is that for many people the date of retirement is out of their control. A McKinsey & Co. survey found that 40 percent of current retirees had stopped working before they planned to. The main reasons for earlier-than-planned retirement are health and layoffs.

Today you may be healthy, like your job, and plan to work for a long time. But an accident or major illness could render you unable to continue your current job, or any job, full time. In the worst case, you may be unable to work at any job.

Of course, you may be able to retire sooner that you thought possible because of good fortune such as a successful entrepreneurial venture or the result of long-term investment returns. Some folks inherit more money than they expected. 

You need to plan for contingencies, including having to retire before your target date. You should expect change. You should have disability insurance in case your health forces early retirement. You also must be ready to change your spending and investment plans in case retirement comes early with no way to replace your paycheck.

Ignoring Non-financial Planning

Financial independence can make retirement easier and make a satisfying retirement more likely. But your finances aren't the only things to focus on during retirement planning - and they may not even be the most important contributor to a successful retirement. The evidence is that other factors greatly influence both your happiness in retirement and your longevity. So don't overlook non-financial matters when planning your retirement.

The following are the non-financial keys that I've observed to be key to a successful retirement:

  • Relationships with other people: Maintaining relationships is important to your health, longevity, and happiness. Various medical studies and surveys of senior Americans reach that conclusion. People who have regular interactions and relationships with others tend to be happier and live longer. The relationships can be with family, people your own age, or those of different ages. They can be through work, organized groups and clubs, or informal associations.
  • Doing things you enjoy: The original prototype for retirement was a period of pure leisure. That may have been appropriate when retirement was relatively short. However, with today's extended retirement and people staying active and healthy longer, most folks need a sense of purpose to be satisfied. Luckily, you can choose from a number of ways to establish a sense of purpose, including work, volunteering, hobbies, and competitive leisure activities. Being active also keeps your mind sharper and healthier. Activities that get you learning new things seem to be important to avoiding mental impairments such as dementia.
  • Flexibility: Your retirement is likely to last 20 years or longer. And, of course, your needs and interests are likely to change during that time. So your retirement plan should be flexible enough to allow you to change activities.

Financial independence is a tool to help you spend time doing the things you really want to do. It isn't an end in itself and shouldn't be the main focus of your time. Part of your retirement planning should be devoted to how you spend your time.

Failing to Coordinate with Your Spouse

When you're married, you don't retire alone, and your retirement plans affect your spouse as much as they do you. When one spouse retires, the adjustment is often as great for the other spouse as it is for the retiring spouse. Remarkably, many people don't seem to realize this, and a number of couples don't discuss retirement plans with each other in detail. Make sure you avoid this mistake and coordinate your retirement plan with your spouse.

A Fidelity Couples Retirement Study conducted by Richard Day Research had some interesting findings:

  • Sixty-one percent of spouses disagreed on what their primary income source in retirement would be.
  • Forty-one percent disagreed about whether at least one spouse would work in retirement.
  • In 39 percent of couples, the spouses had different answers about the amount of life insurance coverage they had.
  • Thirty-five percent gave different answers about their expected retirement ages.
  • Only 38 percent worked together on retirement financial planning.
  • Fifty-eight percent disagreed about who the surviving spouse would ask for financial advice after the other spouse passed away.

Expecting to Age in Place

One of the great myths of retirement is that everyone moves to Florida or Arizona after retiring. The truth is that most people stay in the same general area they lived in during the decades before retirement. High percentages of older Americans say they would like to remain in the same home, or "age in place," as long as possible. While understandable, the goal often isn't practical. You need to consider certain issues, such as cost and effort of maintaining the home and the challenge of living in a larger home.

Aging in place is an understandable goal. But it isn't possible for everyone. You must plan to make it work and realize that reaching the goal is likely to increase the cost of retirement.

When aging in place, you take on a couple significant responsibilities with your larger home:

  • The cost and effort of maintaining the home: For many people, the home they live in when they retire is the one in which they raised their families. So the home likely has a number of bedrooms and other rooms that are no longer used regularly. The extra space is nice when the kids and grandkids come for a visit, but that doesn't happen often in most families. The cost and effort of maintaining the home at some point may exceed the benefits. In addition to the cost of maintaining a home that's larger than needed, many seniors find that rising property taxes become more of a burden than they want to bear.
  • The challenge of living in the home: Most homes people live in at retirement aren't built for people who want to age in place. In other words, they aren't senior friendly. At some point most people become less mobile and more prone to slips and falls. Also, arthritis and other conditions can make simple tasks such as opening doors and cabinets difficult. Many of these difficulties can be overcome by having the home refitted to be senior friendly. However, a refit can be expensive and time-consuming.

Thinking Most Medical Expenses Will be Covered

Another of the myths that many folks believe is that most medical expenses in retirement will be covered by insurance or the government. Some think their employers will continue some version of their medical insurance coverage into retirement. Others believe Medicare covers everything for beneficiaries or is similar to the employer coverage they're used to.

Don't fall into this trap and make this mistake. In retirement, you're on your own for a great deal of your medical expenses and for long-term care. A reasonable estimate of your different health expenditures and how they'll be paid or insured needs to be part of your retirement plan.

Fewer and fewer employers offer any medical expense insurance or coverage for their retirees. Generally only large employers, especially those whose employees are unionized, offer retiree medical coverage. Those employers that do offer medical plans to their retirees have steadily reduced the coverage over the years. Almost all retiree medical plans reserve the right to change the terms at any time, no matter how long a beneficiary has been retired.

Long-term care is another health-related expense about which many people are confused. Long-term care is more than nursing home care. It also includes care provided in the home as well as residence in an assisted living facility.

To pay for long-term care, most of us have two choices: buy a long-term care insurance policy before it's needed or spend personal assets. An insurance policy preserves more assets for your spouse and other loved ones. Insurance also may allow you to enter a higher-quality nursing home or assisted living facility, because payment will be assured.

Many folks don't plan for long-term care, because they assume they won't need it. Technically, they may be accurate. According to an estimate by the Lewin Group, about 65 percent of people age 65 were estimated to need some long-term care in their homes at some point. But a lot of that care is short term and isn't received in a nursing home or assisted living facility. Instead, they'll be cared for in their homes by family members.

But about 35 percent of the group will spend some time in a nursing home (not to mention those who need extended long-term care or residence in assisted living). About 5 percent will spend more than five years in nursing homes, and that percentage will predominantly be made up of women. The bottom line is that, on average, each member of the group will need $21,000 to pay for long-term care, and 6 percent will spend $100,000 or more on long-term care.

Missing the Initial Enrollment for Medicare Plans

The Medicare eligibility rules can be confusing, especially regarding the procedure and the timing for enrollment. The result of this confusion is that too many people pay penalties for signing up late. So you want to make sure you don't miss any initial enrollment dates for the different Medicare plans.

You're eligible for Medicare when you turn 65 and are eligible for Social Security. This rule is one of the main causes of confusion. You must be eligible for Social Security to be eligible for Medicare. But Medicare enrollment isn't tied to when you begin receiving Social Security benefits. You can begin Social Security as early as age 62. You should begin Social Security no later than age 70, because you don't receive increased benefits by delaying Social Security any longer. But you're first eligible to enroll in Medicare at 65, regardless of when your Social Security benefits begin.




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Copyright Eric Tyson, 2008 - 2019 all rights reserved.

Eric Tyson is the only best-selling personal finance author who has an extensive background as an hourly-based financial advisor and who does not accept speaking fees, endorsement deals or fees of any type from companies in the financial services industry or product or service providers recommended in his articles, books and his publications.