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This post is about common retirement mistakes to avoid. These mistakes do not only concern finances. They also matter for other important areas, such as health and relationships.
Retirement Mistake #1: Ignoring Health
Cognitive and physical decline can set in fast as you age. It is a mistake not to prioritize health even at older age. My wife and I have given a lot of thought to it. We recently visited the Blue Zone longevity island of Ikaria, Greece.
People in Ikaria not only live long, but also stay relatively healthy to 100 years and older. It is often said that Ikaria is a place where people forget to die. We observed Ikarians and took notice of several things.
1. Low Stress
Many think it is a food or diet factor. But, we think that Ikarians live long because they succeeded in removing stress almost completely from their lives. Stress is the real killer in Western societies.
How do Ikarians destress? They tend to their gardens, stay active, talk to their friends and neighbors, relax and have a glass of homemade wine. They laugh and brush any problems aside.
When we arrived on the island, we saw this graffiti near the airport. It really sums it all up how Ikarian deal with problems.
Do you have a problem? No? Then don’t worry. Yes? Can you do something about it? If yes, solve it and do not worry. If you cannot do anything about it, why worry then?
2. Natural, Organic Diet
Next, the Ikarian diet is seasonal and varied. They eat meat, dairy and lots of vegetables, even wild ones. Surprisingly, we did not see a lot of fish. Locals told us that fishing is not easy.
Moreover, fishing was dangerous until the last 200 years or so. The reason is simple: pirates often raided and plundered Ikaria until the 1800s. Ikarians had to live in the mountains and rely on domestic animals, olive oil and vegetables.
And, this is where the difference comes in. They grow their vegetables and raise their own goats and sheep. The quality of soil, air, water and food is beyond what you can expect. Moreover, they drink wild herbal teas and have a spoonful of their own homemade honey.
Ikarian honey has many health benefits and it is known to have anti-cancer, anti-inflammatory and antibacterial properties. We tried it there and it had a very intense, but delicious flavor. If you’d like to try Ikarian raw honey, take a look at Klio’s online store. Klio brings authentic Ikarian honey and Greek wild herbal teas to US customers.
- From famous Blue Zone island
- Designated single origin honey
- 100% pure raw and unheated
- Heather (Anama), Thyme, Pine and wildflower varieties
- Produced in limited quantities
3. Relationships
Finally, Ikarians value their relationships with others. We asked our Airbnb host, who was born and raised on Ikaria, about longevity and why other islands do not have it. Her reply shocked us. She said that other islands do not have the same strong sense of community that Ikaria has. And, that sums it all up.
Lessons from Ikaria, Greece
So, what kind of lessons can we draw from Ikaria?
First, cut stress as much as you can. Or, find ways to cope with it. This could include many things. Our preferred method is meditation. Did you know that meditating actually stimulates brain growth?
Next, stay physically active. Then, try to eat organic food as much as you can afford. This makes a very big difference given the common use of pesticides and herbicides. While diet is a very controversial topic, I am a big fan of Dr. Gabriel Cousens and his approach to health. He has a YouTube lecture on how our eating habits influence our cognitive abilities.
Finally, it is not a secret that loneliness can shorten anyone’s lifespan. There are studies that show that loneliness can decrease a person’s life by almost 15 years. Maintaining and cultivating meaningful relationships is something we can all benefit from.
Retirement Mistake #2: Not Planning for Higher Medical Costs
You may wonder why I spent so much time talking about health? The answer is simple. Health care expenses can spiral out of control in retirement. This is the second mistake a senior person can make in retirement. And that is by not planning for higher medical expenses.
According to this Fidelity study, an average retired couple of 65 years needs $315K for medical bills. One potential remedy is to have a long-term-care insurance policy if you happen to need it.
But this is where the mistake number one comes into play. Prioritizing health becomes even more important. It is almost never too late to improve your well-being. By investing in your health today, you will save a bunch tomorrow.
Retirement Mistake #3: Taking Social Security Benefits Early
The third mistake to avoid is to apply for social security benefits too early. You may know that you can apply for benefits as early as at 62. But, your benefits will be about 30% lower compared to claiming them at the full retirement age. The full retirement age stands at 67 if you were born after 1960.
Moreover, be careful with working and claiming benefits before your full retirement age. The government will deduct $1 from your benefits for each $2 earned over $22,320 in 2024.
Retirement Mistake #4: Wrong Investment Approach
The fourth mistake concerns your investment approach. Retirement requires a more conservative portfolio with a focus on capital preservation. In my recent post on problems with the 4% rule, I highlighted the timing as the biggest risk in retirement.
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The worst thing is to retire into bear markets. You will have to sell securities at rock bottom prices. When you were young and earned income, you could have just waited it out. But, it is a different game in retirement. You do not have the luxury of time any more since you must your bills today.
One way to cope with timing risk is to have a higher allocation to dividend stocks at the beginning. Also, having a cash cushion fund to weather declining markets will help a lot too.
Retirement Mistake #5: Unsustainable Spending Habits
The fifth mistake is to continue spending the way you used to spend. As we just covered, your investment approach must become more conservative in retirement. So do your spending habits. Thus, you must have a more realistic budget that your retirement savings can sustain.
The 4% rule provides a decent guidance to that. It says that your portfolio size should equal to 25x of your annual living expenses. This portfolio can last you up to 30 years based on historical data.
Of course, this is just a rule of thumb. Rules can break. Thus, it is very important to maintain flexibility. What do I mean by that? If your portfolio suffers a big loss, do not withdraw the same fixed amount. Your withdrawal rate will be above 4% then. Hence, in the years of stock market decline, it is crucial to tighten your belt and radically reduce expenses. Or, you can always continue doing part-time work in retirement.
Retirement Mistake #6: Miscalculating Required Minimum Distributions (RMDs)
The sixth mistake is to miscalculate your required minimum distributions or RMDs. Once you reach a certain age, the law requires you to take certain minimum annual distributions. And, the government does not care whether you need them or not.
These RMDs cover 401(k), simplified employee pension (SEP), traditional IRA and SIMPLE IRAs. Roth IRA and Roth 401(k) are exempt from RMDs. The RMDs kick in when you turn 73 in 2023. The age threshold goes up to 75 after 2033.
Let me give you an example. Suppose you are 78 years old and your spouse is about the same age. According to the IRS Publication 590-B uniform lifetime table, your distribution period is 22. This number is also known as life expectancy factor. Suppose, your retirement portfolio is $1M, not including Roth IRA and Roth 401(k). Then, you must take an RMD of $45,455 or $1M divided by 22.
Of course, as with any law, there are more specific situations and tweaks. But, RMDs will dictate how much you must withdraw. RMDs are typically taxable at your individual tax rate. However, if you fail to take your RMD, any amount not withdrawn is subject to a 50% excise penalty tax. The SECURE 2.0 Act allows you to lower the penalty rate to 25% or even 10%, if you withdraw your missed RMD within 2 years.
Retirement Mistake #7: Being House-Rich, Cash-Poor
The final seventh mistake is to be house-rich, but cash-poor. Many people pay for their mortgages their entire life. But, when they retire, they have a lot of home equity, but little cash. Houses come along with many expenses, such as utilities, taxes, repairs and maintenance.
If you do not have enough cash to handle them, you may be facing tough choices. This is especially true if your children moved out and you have a big house all to yourself. One option is to downsize and move to a smaller and more affordable home. Moreover, you can cash out your home equity and have more money for retirement. It can be a win-win situation.