As we approach our 50’s we may begin to eye the “finish line” of retirement a bit more regularly. We all know the common rules of retirement. Start saving early. Utilize your 401K and IRA options. Diversify globally. Re-balance your portfolio. However, during times of market volatility, many investors may panic and begin to question or overthink their investment strategies.
Some experts have seen investors destroy their retirement in the blink of an eye with one mistake.
As the market continues to trend up and down, it is important to stay on your course and plan appropriately. Nothing can replace financial education and build a strong network of reliable resources as you approach the golden years.
Below is a list of the five most common mistakes investors make on their path to retirement.
Lack Of Planning
The most common mistake investors make is failure to plan and set goals for their retirement. According to a study by the Economic Policy Institute nearly half of the families in the United States have any retirement savings at all. This is a scary statistic that boils down to planning and goal setting.
Although the topic of calculating retirement savings may be stressful, it is better to address it and work on a plan rather than avoiding it all together. Even if you do have a 401K or IRA set up you should still regularly re-evaluate your savings and investment plans. Knowing your current savings status and what your target goals are will allow you to budget and reach your savings benchmarks.
A 2017 Retirement Confidence Survey, found only 41% of respondents said that they or their spouse had taken the time to estimate how much money they'll need in retirement. Getting a plan together for savings goals that target 1 year, 5 year, 10 year and beyond is important for meeting your retirement needs.
Not Accounting For Inflation
The U.S. inflation rate averages around 2% to 3% per year, which may seem small, but when you factor in how many years until retirement and how many years you could spend in retirement, it adds up quite a bit. For example, say you're 40 years old and have $50,000 saved for retirement. By the time you turn 65, assuming an inflation rate of 2% per year, that $50,000 will only be worth around $30,476. Once you turn 80, that $50,000 will be worth approximately $22,644.
Ultimately this means you need to factor in inflation for your retirement savings planning. You may need to adjust for a higher savings target to consider the value of your funds over an extended number of years.
The best way to plan for inflation is to start with a retirement budget. Estimate what you are currently spending each month on your lifestyle and then forecast this monthly cost 15 to 20 years ahead while factoring in inflation rates for retirement. There are various calculator tools available to assist you in benchmarking these figures. It’s also good to estimate various inflation rates to have a gauge of best and worst case scenarios. Once again we are back to planning, but having inflation considerations factored into your savings strategies will keep you on track for retirement goals.
Mis-Managing Social Security
Many soon to be retirees assume they can start collecting Social Security benefits at any old time or as soon as they are available. This may be a poor strategy for getting the most out of this program. The best way to avoid this pitfall is to learn more about the available options and what makes the most sense based on your financial and health status.
Did you know, you can increase or decrease your benefits by starting to collect Social Security earlier or later than your "actual" retirement age, which is 65 or 66 for most people.
For example, suppose a retiree born in 1944 was able to retire at age 66 and holds off taking any benefits until they are 70 years old. This retiree could receive a credit of 8% times the number of years that they waited(4), which means the total benefit could be 32% higher than what they would have received at age 66.
It's important to take a little time learning more about the social security process and the best moves to make, and you may end up with thousands or tens of thousands more than you expected or miss out if you don’t plan accordingly. That can make a huge difference in your last decades of life.
Under Estimating Long Term Healthcare Costs
Everyone knows health care is very costly, but we don't always keep it in mind when outlining our retirement savings plan. It is estimated that around 70% of Americans turning 65 in the near future will need long-term care at some point according to the U.S. Department of Health and Human Services. In addition, those who require long-term care will each pay an average up to $138,000 to cover those expenses.
Although there is no way to know exactly how much you'll need for your health costs in the future, it does help to have a rough idea. Once again we are back to planning and goal setting. Research and understanding long-term health care cost estimates in addition to building in savings for these costs are valuable ways to prepare for unknown expenses. It is also helpful to take proper preventative healthcare measures by staying fit and having regular checkups to stay on top of your overall health.
Long-term care insurance is also an option, but it can be pricey. While long-term care insurance rates have a wide range, usually the earlier you sign up, the better rate you can expect.
In short, you should keep healthcare costs in mind while evaluating your retirement savings plan. Proper research and understanding of your options in addition to maintaining your health as a whole can help you prepare for this commonly overlook retirement planning mistake.
Not Calculating The Correct Length Of Retirement
Another common mistake many investors make regarding their retirement planning is not calculating how long their retirement may last. If retiring early your retirement years could be considered long and will require adequate savings budget for each year. It is important to have estimates planned out for how much you will need annually to live comfortably in retirement and a rough idea of how long this period of time might be.
Things to consider would include the age at which you plan to retire and your overall health status. If you plan to retire at 63 and live to be 93, that is 30 years of retirement funding that will need to be accounted for. Although it can be scary and difficult to calculate how many years you may live, a good rule of thumb of many financial planners it using 95 years old as a conservative estimate. If you stick with 95 years old and calculate the length of your retirement based on this benchmark you should be able to budget for savings to cover the entirety of your retirement.
Once you do retire, it's also good to do a yearly check in on your budget and retirement savings. Are you on track and spending about as much as you had planned? If not you can look to make budget adjustments or look for other options to help source your incomes needs.
There are many ways to misstep while saving and planning for retirement. The unknown variables that could play a factor are significant. The best strategy for avoiding these mistakes is to prepare early and often. The more planning and preparation you take the better off you will be years down the road. Finding reliable resources and information can aid you in your drive to the retirement finish line.