Retirees' financial mistakes

Despite the best intentions, retirees make the same money mistakes over and over again. If you don't break the pattern of financial neglect, your money may not hold up.

Here's a look at some errors and how to avoid them:

Being too conservative with money. Treasury bonds, certificates of deposit, and other savings instruments with scant yields can give retirees a false sense of security. They guarantee some income, however small, and can provide soothing protection from dizzying stock market volatility. But they do not provide even a fighting chance to keep up with inflation.

The safer move, most financial planners say, is to devote a healthy portion of your portfolio to stocks.

"Retirees tend to be too willing to sacrifice future safety for incremental yields today," says Bob Wiedemer, managing director of Absolute Investment Management, of Bethesda, Md.

Inflation's effect is real, and ravaging over time. To illustrate its effect to his clients, financial adviser Allan Flader of RBC Wealth Management in Phoenix reminds them of the change in the price of a stamp during the last three decades - the length of many retirements nowadays. The cost of mailing a letter has gone from 18 cents in 1981 to 34 cents a decade ago to 45 cents today.

The fix: A rough guideline for asset allocation is to own a percentage in stocks equal to 110 or 120 minus your age. In other words, a 70-year-old would have 40 percent or 50 percent of her portfolio in stocks.

Putting off planning. This is not just a matter of missing out on investment opportunities or tax advantages. It can get you in trouble later, when you are no longer at the top of your game mentally.

The fix: Prepare thorough financial and estate plans and discuss future aging-related scenarios with an adviser.

Bailing out the kids. Kelley Long, a personal-finance expert with the National CPA Financial Literacy Commission, says too many retirees are overly concerned about leaving a legacy, "when in fact their children would trade their inheritance for the knowledge that their parents were living out their days in comfort."

The fix: Put your financial needs in retirement first. Make sure you know how much you can safely spend from your savings each year.

Paying too much in taxes. Retirees usually are in lower tax brackets than when they worked. But they often fail to adjust accordingly.

Putting off taking withdrawals from an individual retirement account until they are required at age 701/2 also can be costly. That's because such amounts are taxable and often bump retirees into a higher tax bracket. A plan of gradual withdrawals starting in your 60s can be a more effective strategy.

Seniors who do regular volunteer work tend to leave tax deductions for mileage and out-of-pocket costs on the table. And snowbirds often do not know they could save thousands of dollars by changing their legal residency to a state with a smaller or even no income tax.

The fix: Have a plan to minimize the tax effect of withdrawals, keep your receipts for volunteering costs, don't miss out on any deductions.

Following advice from friends and family. Enlisting a financial professional instead can pay off in the long run.

The fix: Validate any advice from friends and family with objective materials from somewhere else. If not an adviser, at least credible online resources or organizations, said Jean Setzfand, AARP director of financial security.

Underestimating the costs of health care. A typical 65-year-old couple retiring now will need roughly $230,000 to cover medical expenses, not counting long-term care, according to Fidelity Investments.

The fix: Buy Medigap supplemental insurance that fills in benefit gaps in traditional Medicare. And consider buying long-term-care insurance, which pays for in-home care and nursing-home care, unless your health or age make it unaffordable.