Top 11 Retirement Planning Mistakes to Avoid for Financial Advisors
11 retirement mistakes to help your clients avoid
Retirement is one of the most impactful events in your client’s life. After decades of work, work, and more work, it’s time for your clients to rest and spend the rest of their lives doing whatever they want.
Unfortunately, while their professional responsibilities end here, their financial responsibilities don’t.
Retirement is expensive. And your job as a financial advisor is to make sure that your clients have enough money in their nest eggs so they don’t have to return to the workforce.
Here are some 11 common retirement planning mistakes that clients often make when planning for their retirement. We’ll identify these mistakes so you can come up with a plan to help your own clients sidestep (or fix) these mistakes.
Not having a financial plan
It’s easy to see how much you’ll need in your retirement fund with an online calculator. Just plug in your annual income (minus your income tax) and retirement date, and you’ll get a gross estimate within seconds.
The hard part is what comes next.
Although it’s often overlooked, a solid financial plan is the foundation for a successful retirement and should be a top priority for clients looking to secure their financial future.
To help your clients avoid running out of money or facing financial hardships in their golden years, help them to develop a comprehensive retirement plan that takes into account the various factors at play in their retirement years. This includes factoring in their desired retirement age, the location where they want to retire, their general health and life expectancy, and the lifestyle they want to lead once they become a retiree.
By having a clear roadmap, clients can make informed decisions about how much money they need to save and invest to achieve their retirement goals. As a financial planner, you play a pivotal role in guiding clients through this process, ensuring that their retirement plans are not sabotaged by a lack of foresight or preparation.
Not saving money now
Stress the importance of building a habit of saving and investing to your clients.
The sooner they begin, the more secure their retirement will be, as the power of compounding interest allows their savings to grow significantly over time. By starting early, clients can take full advantage of this financial phenomenon and ensure a more comfortable future.
For Americans, make sure your clients understand the benefits of contributing to retirement accounts like 401(k)s and IRAs. These vehicles provide tax advantages that can help maximize their retirement savings. Educate them about the differences between each type, and guide them to determine which option is best suited for their current circumstance.
Investing poorly
Be it a traditional, Roth, or even self-directed IRA, navigating the world of retirement investment can be challenging for many.
For most people, making the right investment decisions doesn’t come naturally.
Often, investing for retirement comes with a steep learning curve due to the sheer number of options your clients can make. Your clients might feel overwhelmed by the number of decisions they have to make while, perhaps, not understanding the long-term implications behind those decisions.
In this context, your expertise is invaluable.
Assist your clients by educating them on the importance of diversification, risk management, and long-term strategies to achieve their financial goals. Work closely with your clients to understand their unique needs and circumstances so you can recommend investments and pick an investment strategy that best suits their retirement accounts.
Racking up debt
To make sure your clients will have a comfortable life during their retirement, it’s important to address their debts.
As a financial advisor, you can help your clients manage and reduce their debt while continuing to save for their future. Striking the right balance between paying off debt and saving for retirement is necessary for long-term financial security.
Debt accumulated before retirement can negatively impact savings, making it harder for your clients to enjoy their golden years. Make sure that you’re also paying attention to expenses that can easily creep up on you, such as credit card debt.
Encourage them to maintain an emergency fund to prevent last-minute debt or the need to dip into their retirement savings accounts prematurely. Work with your clients to develop a strategy for paying off or reducing debt before retirement without sacrificing their savings contributions.
By emphasizing the importance of tackling debt and saving for retirement simultaneously, you'll help your clients achieve a more secure financial future and enjoy the retirement they've worked so hard for.
Overspending in retirement
Besides building the financial plan and helping them get to their savings goal, you might also be responsible for their financial life during retirement.
As people progress through their retirement years, their priorities and needs may shift – making it necessary to reevaluate their financial plans accordingly. You should be able to guide your clients through the process of adjusting their spending habits during retirement.
To help your clients effectively manage their retirement finances, assist them in understanding the various income sources and retirement benefits they can rely on, such as pensions, Social Security benefits, and investments.
Once they have a clear picture of their income streams, work with them to create a realistic budget that aligns with their lifestyle goals and available resources. By emphasizing the importance of living within their means and adapting to changing priorities, you can help your clients make informed decisions and enjoy a more secure and fulfilling retirement.
Not maxing out on company 401k matching
One of the most valuable tools for retirement savings is a company-sponsored 401(k) plan, especially when it comes with an employer-matching contribution. Make sure your clients are taking full advantage of this opportunity to boost their retirement savings.
Encourage them to enroll in their company's 401(k) plan and contribute enough to receive the maximum employer match. This is essentially free money that can significantly increase their retirement savings over time. Typically, employer matches are based on a percentage of the employee's salary. For example, if you contribute 6% of your salary, your employer might match 3%.
Help your clients make the most of their retirement savings by guiding them to maximize their contributions and take full advantage of this benefit.
Cashing out early
Switching jobs often leads to a big decision regarding your client’s retirement savings – should you cash out your 401(k) or roll it over into a new account?
Cashing out of a 401(k) prematurely can have severe financial consequences, including penalty fees and taxes, which can significantly reduce the overall amount received. Additionally, it's challenging to make up for the lost savings and future earnings potential once the funds are spent.
Instead, encourage your clients to roll over their 401(k) balance into a new retirement account, such as an IRA or their new employer's plan, if available. This approach will help them avoid the 10% withholding penalties from the IRS and ensure their savings continue to grow for their future retirement needs.
Poor tax planning
Effective tax planning can significantly impact the amount of money available for your clients during their retirement years.
For clients who expect to be in a higher tax bracket during retirement, it might be more beneficial to invest in a Roth 401(k) or Roth IRA. These accounts require paying taxes upfront, but all future withdrawals will be tax-free.
Conversely, if your clients anticipate being in a lower tax bracket after retiring, a traditional IRA or 401(k) could be the better option. In this case, contributions are made with pre-tax dollars, deferring taxes until withdrawals are made during retirement.
By assisting your clients in making informed decisions about their retirement accounts, you can help them optimize their tax situation and maximize their retirement savings.
Not planning for health care costs
Healthcare expenses may have a considerable impact on your clients' financial well-being, especially after retirement.
According to the Fidelity Retiree Health Care Cost Estimate, a retired couple aged 65 in 2022 may require roughly $315,000 saved after tax to cover health care expenses throughout retirement.
Planning for long-term care can help protect your client’s assets and alleviate the financial pressure they may feel after retirement.
If your clients choose to rely on Medicare, gently remind them that Medicare doesn't cover all retirement healthcare expenses, and there may be gaps in coverage. Make sure that they are prepared to pay the difference out of pocket or suggest the idea of purchasing supplemental insurance.
By guiding your clients through the complexities of healthcare costs during retirement, you can help them avoid financial surprises and enjoy a more secure and comfortable retirement.
Taking social security early
Delaying Social Security benefits can significantly impact your clients' overall retirement income.
By waiting until their full retirement age or even until age 70, they can maximize the amount they receive in benefits. Full retirement age varies between 66 and 67, depending on your client’s birth year. Although you can file for benefits as early as 62, holding off until age 70 can result in higher monthly payments.
There are, however, certain circumstances where delaying may not be the best option.
If your client is in poor health, they may need to start receiving benefits sooner. Additionally, if spousal benefits are a concern, filing at full retirement age might be the better choice, allowing the spouse to file and receive benefits under your client's account.
Not having an estate plan
A key part of retirement planning is making sure your client's assets go to their loved ones after they pass. An estate plan can help achieve this goal and provide peace of mind for both your client and their loved ones. As a financial advisor, you should help them establish critical documents, such as a will, living trust, and powers of attorney for assets and healthcare directives.
You should also consider customized tax planning strategies to maximize the estate's value and minimize tax liabilities. By lending your expertise in this matter, you can help make the process smoother and less burdensome for their family and beneficiaries while preserving their legacy.
Let Asset-Map help with the retirement planning process
By addressing these common mistakes people often run into when planning their retirement, you can help your clients build a more secure and fulfilling retirement.
Your expertise and guidance are invaluable in navigating the complex financial landscape and ensuring that they make the best choices for their unique circumstances.
By educating your clients on these pitfalls and providing tailored advice, you can empower them to take control of their financial future and enjoy the retirement they've worked so hard to achieve.
Help your clients grasp the impact of their choices with Asset-Map’s visual aids. For example, Target-Map helps you to quickly demonstrate what certain choices will do for your client’s financial goals throughout their life.
Illustrate the consequences of their decisions within a few clicks and help your clients make more informed decisions.
Schedule a demo today and see how else Asset-Map can help you simplify your business processes.