Five Mistakes to Avoid When Planning for Retirement
Robert H. Louis, The Legal Intelligencer
There is no shortage of advice offered to those approaching and planning for retirement: how to invest, where to live, what insurance to buy. Despite this abundance of guidance, many people are not preparing in a way that will maximize their chances of a comfortable retirement. Here are five mistakes that should be avoided, and can be, with thoughtful planning.
Failing to save on a tax-deferred basis
Numerous provisions of the Internal Revenue Code permit individuals to save for retirement on a tax-deferred basis. This kind of saving reduces income tax liability now and permits a larger amount to be put to work, with taxation occurring, in most cases, when funds are distributed in later years. But those who do not save as much as they are permitted are throwing away a valuable benefit. There are three ways this might occur:
• Many people have access to a 401(k)-type retirement plan, which permits retirement saving through a reduction of current compensation, to a statutory limit of $18,000 in 2015 (plus another $6,000 for those who have reached age 50). Failing to save the maximum reduces the amount available for retirement by a multiple of the shortfall.
• Individuals short-change their retirement savings by failing to set up retirement plans that go beyond the 401(k) limits and permit saving the statutory maximum under Section 415 of the Internal Revenue Code, which for 2015 is $53,000, plus the additional $6,000 mentioned above. The rules for such plans can be complicated, but the effort is repaid with a much larger retirement fund. (It’s possible to use a defined benefit pension plan to achieve retirement goals, with even higher funding amounts, but the complexity of such plans has led to a decline in their use.)
• Beyond the retirement plan rules, it is possible to save additional amounts through a nondeductible individual retirement account. Even if an individual is saving the maximum permitted for retirement plans described above, an additional amount may be saved through such an IRA. While there is no deduction for the amount contributed, the contributions grow on a tax-deferred basis. In addition, and perhaps very importantly, regularly scheduled contributions to any type of retirement plan create a disciplined approach to saving that is more conducive to accumulating retirement funds than saving outside of a plan. In this category of mistakes could be included failing to understand the different rules for Roth IRAs, and whether converting from a traditional IRA to Roth makes sense. Summarize this first mistake as failing to make the optimum use of the retirement savings options permitted under federal tax law.
Poor management of investments
One of the advantages claimed for 401(k) plans and IRAs is that they permit individuals to control their retirement destiny by investing skillfully to achieve their financial goals. The truth is somewhat different. Those who manage their own investments often neglect them because they have their own careers to manage, and generally have little skill in investing. Many studies bear out the belief that investors typically do worse than the investments they make; often because they “flit” from investment to investment seeking last year’s winners. Better to invest with professional advice or by use of a target retirement fund, which manages the mix of investments based on attained ages.
Failing to consider all elements of income, expenses
The error many make is failing to plan for the receipt of Social Security and Medicare benefits. There are a number of options as to when to begin receiving Social Security, and the answer is definitely not the same for everyone. Likewise, there are options regarding Medicare and the supplemental insurance that is needed as an add-on to Medicare. Again, one size does not fit all, and individualized professional advice might be advisable.
Failing to develop a transition plan for legal practice
Too many people are still following the policy of wanting to practice until they are physically unable to do so. The problem with this type of planning is that one doesn’t always know when it is time to quit. Further, and increasingly, lawyers in firms don’t have that option. A better practice would be to consider whether clients would be better served by a transition of the practice to others; and whether a better lifestyle choice for the lawyer and the lawyer’s family would be a gradual but definite transition plan, perhaps permitting the lawyer to continue practicing on a reduced basis for a longer period of time. But that ties closely to the fifth mistake.
Failing to plan for life after work
Part of the fear of transitioning or phasing down is that there might be little to occupy one’s time after partial or complete retirement. But experience is just to the contrary. In the course of writing and speaking on retirement issues, I have interviewed many retired lawyers, and I have yet to find one who is bored or has little to do in retirement. The fear I have heard expressed at seminars by older lawyers, that they will spend their days sitting in a coffee shop, is not a valid concern for those who have put some thought into their post-retirement lives.
In summary, retirement years can be a fulfilling reward for most of a lifetime of hard work, but like everything else in our practices and our lives, it requires careful planning that begins many years before retirement.
Robert H. Louis is a partner and co-chairman of the personal wealth, estates and trusts department at Saul Ewing. His practice includes estate, tax and retirement planning for individuals and closely held businesses.