Keep it in the fairway

If I’ve learned anything from the hundreds of golf balls I’ve lost over the years, it’s the importance of keeping them in the fairway. I discovered: a) it makes them much easier to find; b) it seems to make subsequent shots more successful; and c) golf – as a metaphor for life itself – is less about brilliant successes and more about avoiding dumb mistakes.

And so it is with retirement.

Here are some of the mistakes I see most often, and how to head them off:

• Overspending. It’s not uncommon for new retirees to spend more money in their first year of retirement than they did when they were working. That can be a problem for two reasons: 1) retirees are most vulnerable to market volatility in the first few years of retirement; and 2) early splurges can set the stage for more overspending later on. My advice: Make big purchases while you’re still working if possible, and build future one-time expenditures into your spending plans.

• Underestimating health care costs. Staying on your employer’s health care plan under COBRA might sound like a good deal, but you’ll probably find it costs more than you thought. Medicare isn’t free either, and it doesn’t cover everything. And paying for long-term care – or insurance to cover it – can bust your budget if you fail to plan for it. My advice: Get health care coverage nailed down before you retire, and build those costs into your spending plan.

• Expecting a windfall from downsizing. Many of our clients are shocked to discover they’ll have to pay more for a smaller, more efficient home than what they can get by selling their current home. And they often fail to consider moving costs, insurance, and taxes, all of which could be higher as well. My advice: Before you decide to move – around the corner or across the country – research your future cost of living. BestPlaces or RetirementLiving offer online resources to help you make comparisons.

• Underestimating taxes. Social Security is a vital source of income for most retirees, but many don’t realize that up to 85% of their benefits could be taxed as income each year. Traditional IRA withdrawals – mandatory beginning at age 72 – are typically fully taxable on the federal level. And those required minimum distributions could wind up making Medicare much more expensive as well. My advice: Meet with a qualified tax advisor – again, before you retire – to discuss Roth IRA conversions, qualified charitable distributions, and other potential strategies to help manage future taxes.

• Supporting your kids when they’re grown. It’s one thing to help your children when you’re working and earning money. But after you retire, money you give or spend on them can put your own future financial security at risk. My advice: If necessary, remind your family that spending too much early in your retirement increases the possibility that you might become a financial burden on them one day. As they say on airplanes, make sure your oxygen mask is securely in place before helping anyone else.

If there’s a common thread here, it’s to expect the unexpected in retirement, and plan for it. Talk these issues through with your financial and tax advisors, come up with a plan that you’re all confident will succeed, and then update that plan regularly for the rest of your life.

And if you ever see me on the golf course, duck and cover.