Once you’ve mastered the basics of retirement planning [LINK TO RETIREMENT PLANNING FOR DUMMIES PART 1], it’s time to dig a little deeper into what not to do. Many people make financial decisions that can jeopardize their retirement years.
Instead of leaving your future up to chance or taking a misstep, take a look at these common retirement planning mistakes and how to avoid them. Your future self will thank you.
Starting Late
The early bird gets the worm, and retirement planning is no different. Many people underestimate the power of compounding interest, which can significantly boost your savings over time.
For example, setting aside $100 a month from age 20-60 amounts to $54,100 in savings. However, if that money is invested where it can average 4% annual returns, compounding monthly, you’ll end up with $151,550.
Starting early and maximizing your annual contribution limits gives your money more time to grow. Even if you can’t hit the maximum, small contributions can add up over the years, making a big difference in your retirement fund.
Not Diversifying Your Investments
Another common mistake is concentrating your investment portfolio on one type of stock or asset class. Putting all your money in one type of investment makes your retirement savings vulnerable to market fluctuations.
Diversification helps to spread the risk. One stock or asset class may experience a dip, but investing in a mix of assets helps preserve your portfolio– and your retirement– from major losses. You’ll have other income sources to pull from, which may even give the asset time to rebound.
Not Prioritizing Healthcare
Underestimating healthcare costs in retirement is a common mistake. Many people don’t realize how much they will need for medical expenses.
A 2022 study found that the average couple retiring at age 65 will spend $315,000 on healthcare over the course of their retirement. With Medicare Part B premiums on the rise, this number is only going up.
In short, you can’t afford to forget about or underestimate healthcare costs when planning for retirement. Work with your financial advisor to determine how much to save for costs like insurance premiums, out-of-pocket expenses, and long-term care. You may also ask about ways to save strategically for these expenses, like an HSA or an annuity with long-term care benefits.
Ignoring Inflation
Inflation is often overlooked in retirement planning. It’s a silent eroder of your retirement savings, reducing your purchasing power over time.
It’s crucial to factor in inflation when calculating your retirement needs. Your investment strategy should aim to outpace inflation to maintain your lifestyle. You can do this by diversifying your income, managing your withdrawal rate, and saving strategically to allow yourself flexibility.
Not Adjusting Your Strategy as You Age
Retirement planning needs to grow and evolve alongside you. As you approach retirement, your investment strategy should evolve to reflect your risk tolerance.
In your younger years, more aggressive investment options may be suitable, since you have time to average out high and low returns. However, as you age, shifting towards more conservative assets can help preserve your savings.
Your plan should also adjust to reflect your goals and changes in income or personal circumstances. In certain seasons of life, it may make sense to allocate more of your assets toward home ownership or education. As you age, you may want to redirect your cash flow and take advantage of catch-up contributions to your retirement account.
Make time to review your retirement plan and investment strategy regularly with your financial advisor. This way, you can make sure your plan is well-positioned to meet your needs.
Not Making Specific Retirement Plans
Have you thought about your retirement beyond not working? Vague retirement goals can leave holes in your financial strategy and lead to dissatisfaction or even depression after retiring. Nearly one in three retirees report feelings of depression, a statistic that may be partially due to lacking a sense of purpose or decreased social interactions after leaving the workforce.
Determining how you want to spend your retirement is the key to saving effectively and enjoying it more fully. Consider factors like hobbies, travel plans, and other lifestyle choices. Where do you want to live? Do you want to be able to take your family on a few big trips? Maybe you want to pursue a second career, which could supplement your income and allow you to pursue a passion project. Concrete plans can guide your saving and investment strategies more effectively.
Making Early Withdrawals
Resisting the temptation to dip into retirement funds early is crucial. Early withdrawals can lead to penalties and lost growth potential. Remember what I mentioned about the power of compounding interest? If you withdraw early, you likely won’t be able to save up enough to make up for lost potential interest.
Some scenarios allow you to take penalty-free withdrawals from your retirement accounts, like a permanent disability or for qualified higher education expenses. While you won’t pay penalties, you’ll still lose growth potential.
Instead, it’s wise to build up an emergency fund so you can handle life’s curveballs without compromising your retirement savings.
Not Delaying Social Security Benefits
When it comes to Social Security benefits, timing is crucial. The age at which you start collecting these benefits can significantly impact your retirement income.
If you start too early, you may receive smaller monthly payments. On the other hand, delaying until you reach the full retirement age of 65 or beyond can increase your benefits. It’s essential to consider your financial needs and health status when deciding when to start collecting Social Security. If possible, plan to receive income through other investments until after age 70, when your Social Security benefits stop increasing.
Neglecting an Estate Plan
Estate planning is a critical aspect of retirement planning that is often overlooked. Without a proper estate plan, your assets may not be distributed as you wish after your death.
Having a well-structured will or trust can help avoid potential family disputes and ensure your assets are passed on according to your wishes. It can also help reduce the taxes your beneficiaries will owe. Make sure to keep your estate plan updated to reflect any changes in your financial situation or family circumstances.
Entering Retirement with Debt
Carrying debt into retirement can be a significant burden. It can eat into your savings and limit your financial freedom during your golden years.
It’s crucial to prioritize paying off high-interest debt before retirement. This includes credit card debt, personal loans, and other forms of unsecured debt. You may find the snowball or avalanche method to be a helpful strategy– and don’t forget the importance of budgeting.
By entering retirement debt-free, you can focus on enjoying your retirement rather than worrying about debt repayments.
Retiring too Early
Retiring at 50 may sound appealing, but it comes with its own set of challenges. One of the main concerns of early retirement is outliving your savings.
Planning for a longer retirement involves careful budgeting, aggressive saving, and smart investing. It’s also important to consider healthcare costs and potential inflation. With proper planning and preparation, retiring at 50 can be a realistic and achievable goal.
Going It Alone
Retirement planning can be complex and overwhelming. This is all the more reason to seek professional advice when navigating the intricacies of financial planning.
A financial advisor can help you plan more effectively, introduce you to savings and tax strategies you may not know of, and help you avoid common retirement planning mistakes. They can guide you toward informed decisions that align with your retirement goals and financial situation.
Remember, it’s never too late to seek professional advice when it comes to securing your financial future. If you’re wondering if it’s time for you to hire a financial advisor, start here.
Retire Smarter
These retirement planning mistakes may be common, but they’re certainly not unavoidable. Planning for a secure and confident retirement is well within your reach, as long as you stay informed and proactive in your retirement strategy.
Remember, retirement planning is not a one-time event but a continuous process. Regularly reviewing and adjusting your plan can help you stay on track. This is even easier with a financial advisor who prioritizes your interests and understands your goals.
Take the next step with Caviness Wealth Management by scheduling a complimentary web conference to explore how we can assist you further. Book your time here: https://go.oncehub.com/dcaviness, or call me at 972.499.8273.
Of course, you can always stay connected and learn more about pursuing your financial goals by following us on LinkedIn. Let’s get you back in control of your finances and your future.
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This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Asset allocation does not ensure a profit or protect against a loss.
