Many people want to plan for their retirement, but they either don’t know how to get started or they are starting to plan and are afraid they will make a mistake. This is why retaining a retirement planner is important, because he or she will help steer clients through the maze and help them realise both the life they want to lead in retirement as well as keep them financially secure right now.
Here are some of the biggest retirement planning mistakes that it is possible to make and how to turn things around.
1) Underestimating your needs..
To get started with retirement planning, you need to know how much to set aside each month in order to reach your ultimate goal. But what is your ultimate goal? Many advisors will ask how much you will need to have to maintain the life you currently lead. If you aim too high, you can end up feeling like you’ll never be able to reach your goal.
But, failing to plan is planning to fail. And if you don’t set aside enough money for retirement, you could end up in a severe financial pinch during retirement, leading to added stress.
Many legends out there will say that you need to have 80% of your typical annual income as your annual retirement income. There are some catches to this guideline, however. If you want to keep the same lifestyle you have now, you will clearly need to cut out 20% of something (or things). In retirement, you might end up spending more on entertainment and travelling than you did during your working years because now you have the time to do it.
Something else the 80% guideline does not factor in is the rising cost of medical care and prescriptions, and typically as we age, we do run into more health problems than we did in our younger years.
The best bet here is to partner with your financial planner to utilise a proper retirement calculator, and bring in your estimated pension income and Social Security income. You should also have a target date for when you want to retire, since that can impact your monthly payments if you wish to retire early.
2) Rising Health Care Expenses
We mentioned before that the cost of health care for older adults is higher, generally speaking, than for younger adults. A study done by Fidelity Investments in the US found that a couple who retired at the age of 65 could expect to pay as much as $240,000 in out of pocket medical costs. By not building in a cushion to help defray some of these costs, your retirement years could be much more stressful than you ever meant.
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3) Start Saving in late 30’s…
You might think that it’s important to start saving once things stabilize in life, but as you are just starting out it’s actually the perfect time to start saving. You will actually be able to get to retirement easier even if you are setting aside just a little bit each month while you are in your 20s. The concept of compound interest applies to your retirement fund because it allows small bits to be multiplied, then the next month, that additional amount is multiplied again, and so on.
If you start setting aside money in your 20s, you can actually be a millionaire by the time you retire. Wouldn’t that be nice? Making saving a priority can really take you places.
4) Forget to Update Your Plan when Circumstances Change
Life happens, and many times when it does, it hits you right in the wallet. The economy ranges from strong to recession, and when that happens, interest rates tend to flatten, and investments don’t return as much. If you had a growth plan with some more aggressive investments, that plan is the one that could actually end up losing money during a recession.
It might be time to call your financial advisor to move some of the funds from your higher risk fund into a lower risk fund. You won’t realize the rapid gains that you could have under the high risk plan, but you certainly won’t be losing money either.
You may also want to change your retirement plan if you have children. Including a college fund is a smart move. You should also update your plan if you need to care for an elderly relative, as this will impact your income and savings with potentially dramatic results.
Ideally, even if you don’t have any major life changes, you should review your retirement plan every five to ten years just to make sure that it meets your needs.
Throughout your financial life, you should partner with a financial advisor who can help you prepare the best retirement plan for you. Then, once it has been created, review it periodically to make sure it still fits. Don’t be afraid to ask questions of your advisor –she expects and welcomes them. Your partnership can then help you avoid the most common retirement planning mistakes.