As we approach our 50’s we may begin to eye the “finish line” of retirement more often. We all know the [common rules of retirement]. However, during times of market volatility, many investors may begin to panic and overthink their strategies.
Some experts have seen investors destroy their savings in the blink of an eye with a single mistake.
As the markets trend up and down, it is important to stay on course and plan appropriately. Nothing can replace financial education and strong planning as you approach the golden years.
To help with that, here are the five most common mistakes you must avoid:
1) Lack of Planning
The most common mistake investors make is failing to plan and set goals for their retirement. According to a study by the Economic Policy Institute, only half of the families in the United States have any retirement savings. A 2017 Retirement Confidence Survey, found only 41% of Americans said that they or their spouse had taken the time to estimate how much money they'd need in retirement. That is scary.
Although the topic of retirement savings can be stressful, address it early and often. Even if you already have a 401K or IRA set up, regularly re-evaluate your savings and [investment plans.]
2) Not Accounting for Inflation
The U.S. inflation rate averages 2-3% per year, which seems small, but quickly adds up. For example, say you're 40 years old and have $50k saved for retirement. By the time you turn 65, with an inflation rate of 2% per year, that $50k will only be worth around $30k. Once you turn 80, that $50k will only be worth $22k.
The best way to plan for inflation is to start with a retirement budget. Estimate what you are currently spending each month and then forecast this 15-20 years ahead while factoring in inflation. There are [various calculator tools] available to assist you. Estimate various inflation rates to have an idea of best and worst case scenarios. Remember, early planning can often mean early retirement.
3) Mis-Managing Social Security
Many soon-to-be-retirees think they can start collecting Social Security benefits at any old time or as soon as possible. This is a poor strategy for getting the most out of this program. Instead, find options to fit your specific financial needs.
For example, did you know you can increase or decrease your benefits by starting to collect Social Security sooner or later than your "actual" retirement age?
Suppose a retiree was able to retire at age 66 and holds off taking any benefits until they are 70 years old. This retiree could receive an 8% credit, times the number of years that they waited (4), means the total benefit could be 32% higher than what they would have received at age 66.
With a little research, you may end up with $1000s or tens of $1000s more than you expected. What a difference that will make!
4) Under-Estimating Long-Term Healthcare Costs
Everyone knows health care is very costly, but the U.S. Department of Health estimates that around 70% of Americans turning 65 will need long-term care at some point. Even worse, those who will require such care will pay on average $138k to cover those expenses.
Although there is no way to know exactly how much you'll need, research and understand long-term health care cost estimates, and build up a healthy saving. It is also helpful to stay active and have 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, good research while maintaining your health will help you avoid this common retirement planning mistake.
5) Not Calculating the Correct Length of Retirement
It is important to plan how many years you will be retired and how much money you will need in each year to live comfortably.
Consider at which age you plan to retire and your overall health status. Most financial planners say a good rule of thumb is to use 95 years old as a conservative estimate, so plan accordingly.
Once you do retire, it's also good to do a yearly check in on your budget and savings. Are you on track or spending as much as you had planned? Are your investments too conservative or too aggressive? Feel free to make adjustments and look for other options to help add to your income.
Bottom Line
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.
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