Retirement is specific to each person’s situation, but it’s common to see retirees making the same mistakes.
Here are five of them:
1. Confusing retirement eligibility with retirement ability
The numbers matter.
Many times, when people have reached a certain age or met a years-of-service requirement, they are not really in a position to afford full retirement.
The most important thing to do is to sit down and go through a comprehensive assessment. Look at your expenses and determine how much of those can be covered by income sources like Social Security or a pension, then focus on what you’ll need to draw from your investments in the first year to cover any additional costs.
You should run those numbers using different rates of inflation. That way, you can determine if you’re ready for every year of retirement, not just the beginning.
2. Miscalculating savings needs
Most employees are not saving anywhere close to what they need for a sustainable retirement. Contributing 5% or 6% to your 401(k) is usually just enough to receive the full benefit of your company match, but it doesn’t do much else for retirement.
Most people need to contribute much more for a successful retirement. Unless they’re working with an advisor and have a plan in place, it’s rare to see anyone contributing 10% or more to their employer retirement plans. This has to change if they want to retire comfortably. Anyone age 50 or older should be contributing a minimum of 15%.
3. Borrowing from their 401(k)
This is a retirement killer.
I understand – sometimes emergencies happen, and it’s the only option, but borrowing from your employer retirement plan should absolutely be the last resort. By age 50, you should have ample emergency funds on hand to cover anything but the direst of events. If not, you may need to rethink your situation. It may be a good indication that you’re living beyond your means.
4. Not planning for how long you could live
Longevity makes all other risks greater. The longer someone lives, the more problematic everything else can become. As a result, your money has to last longer with potentially greater health care costs and higher inflation.
More than ever, retirees need guaranteed sources of income to help manage risk and provide a dependable source of income over their retirement years.
5. Not planning at all
Let’s face it – if people wanted a financial plan, they would have one.
There’s an enormous level of avoidance about retirement planning, even though it’s so critical. Sometimes, I try to imagine all the negative things running through consumers’ minds when they think about planning:
- Maybe it’s fear of coming up short of the retirement dreams they’ve had all their lives.
- Maybe the idea of spending hours gathering data, creating a budget, and taking a hard look at spending doesn’t sound pleasant.
- Maybe they don’t want to be accountable – to themselves or their spouse – and just hope for the best.
Most people don’t have a formal budget but rather an idea of what comes in every month and where the guardrails are. Instead of leaving people nervous and confused, we as financial planners must present this process differently. We need to develop a more collaborative, less obtrusive way to bring this information out of people and into the light, for their benefit.
Creating a sound plan
How can Americans steer clear of these five pitfalls on their way to retirement? Creating a plan is the best defense.
Recognize, however, that the plan won’t be perfect and won’t solve everything. There isn’t a plan that can solve for all the variables you’ll come across. Adjustments may be necessary along the way. That’s why flexibility is key.
But the plan has to be simple and straightforward so that you can communicate about it with your spouse, children, attorney, or financial advisor on a frequent enough basis (at least annually).
What should a financial plan contain in order to be sound and effective?
- A retirement accumulation plan that will map a course for making sure your saving and spending goals are aligned with the lifestyle you want in retirement
- An investment policy statement: a one-page document that solidifies the goal of the investment portfolio, the growth, and the subsequent income expected from that portfolio based on historical rates of return and inflation
- A corresponding investment portfolio designed to get you to retirement and produce the income you’ll need once you get there
These factors will dictate the asset allocation – how much money you’ll need to allocate to various investment types (stocks, bonds, cash, etc.) to achieve your goals.
You may be able to achieve all of this on your own, but in most cases, this exercise is more productive with the help of a trained professional. In general, Americans planning their retirement need personalized advice and are better off for it. So, make it a New Year’s resolution – meet with an advisor and make a plan.
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