Looking at the current state of the economy, and the proposed Social Security and Medicare cuts by President Obama, economist Teresa Ghilarducci estimates that half the middle-class workers will be poor or near poor in retirement, and reduced to living on a food budget of about USD 5 a day. Today, that amount isn't enough to buy a decent bag of cat food.
To live a fulfilling lifestyle without the support of a paycheck, retirees need to be smart with their finances. They also need to understand that they aren't young anymore, and any ignorance on their part regarding their investments can invite some serious trouble.
Also, many retirees don't have a clue about the various IRS (Internal Revenue Service) rules and regulations, and various tax policies associated with their retirement accounts.
The end result - they encounter serious difficulties in getting their money back, and often lose a major share of their earnings due to the various complications involved. Hence, to ensure that their post-retirement time is not spend worrying about money, retirees need to be extremely careful, and avoid the following errors.
It definitely is a wise decision to have some part of your earnings in stocks during employment, but as time passes, it is also essential to reassess the money invested, and how much is it worth today. Delaying this simple observation can prove extremely costly, especially in a volatile stock market that is known to offer low interest rates.
Many retirees often buy their kids' first home, even when they can't handle their own retirement. Some pay the entire college fees of their grandkids, even if they have to take a loan which they can't repay. Don't go overboard with generosity, and keep a limit on the amount that can be given to your kids.
A heart-warming gesture, but one which not only puts their finances at risk, but also makes the retiree vulnerable to the infinite Ponzi schemes running around the country. Hence, financial experts advise the services of a professional, when it comes to handling finances.
Moving money from a 401(k) to an individual IRA account is pretty common in the US, but many don't follow the proper procedure.
Most retirees ask for their 401(k) savings to be sent to them personally, with the intent of depositing the money in their IRA account later, but the IRS considers this as a taxable distribution. The smart thing to do here is to opt for a direct transfer of the funds, so that the tax can be avoided.
The worst part is, that most seniors don't have enough savings that can help them get through retirement. Ideally, people should start their financial planning at the start of their career, and should invest in a plan that has been designed to provide them long-term gain.
According to statistics, most Americans start claiming these benefits as soon as they retire without realizing that delaying the claim on Social Security can actually increase the percentage of their monthly benefit. After the retirement age, if the retiree delays his/her claim up to age 70, he/she can earn an additional 8% every month for each delayed year.
Failure in Withdrawing Required Minimum Distributions (RMDs)
According to the IRS, 'Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires.'
It is essential that RMDs are annually withdrawn from traditional IRAs, rollover IRAs, 401(k) plans, or any type of retirement account plans provided by the employer.
They should be withdrawn on 1st April of the year the retiree turns 70½. Thereafter, these distributions must be taken by December 31st of every year. Failing to do so can result in an additional 50% tax penalty imposed by the IRS.
One of the best possible ways to avoid these mistakes is to have a meeting with a professional, and then weigh the pros and cons. Always remember that making serious money takes years, but one wrong decision can drain all of it in a snap.