When Planning for Retirement Four Common Mistakes Nearly Everyone Makes
You may have been told by a well-meaning parent, friend, or financial advisor that you should “Save at least 10% of your money for retirement.” This rule of thumb gives those of us with no idea where to begin planning some initial guidance, but it is by no means applicable to every person and circumstance.
A question I often ask people is “Do you believe that saving just 10% will be enough to finance the retirement you want?”
For most people, the answer to this question is,” No,” especially for those who fail to start planning early. The later you decide to start saving and the more money you make, the more you will need to save. It is also even more critical for you to avoid making mistakes with your money from which you will not have time to recover and which will severely impact your post-career life.
Over the years, I have uncovered dozens of common mistakes in retirement planning that have the potential to derail even carefully-thought-out plans. Becoming aware of these pitfalls and strategizing to avoid them will go a long way toward helping you craft a retirement that is less stressful, more prosperous, and highly enjoyable.
Here are a few of the most common things that nearly everyone fails to take into account when thinking about retirement:
1. Failing to visualize a long life. The Social Security Administration says that statistically, one out of four 65-year-olds will live past the age of 90. That sounds great, I know, especially if you are still active and engaged in life like a Warren Buffett (88) or Clint Eastwood (also 88!) Just remember that if you retire at 65, and your life expectancy is 90, you will have to provide income for 25 more years and add additional income to provide for inflation. Have you saved enough to cover the possibility of a long life?
2. Failing to plan for health care costs. An astonishing number of Americans I meet are of the mindset that once they turn 65 and enroll in Medicare, their health care will be free. Perhaps they are conflating Medicare and Medicaid, the latter of which is a free program available only to the poorest in the country. Medicare, unlike Medicaid, is far from free and many seniors are shocked at just how much they end up paying for this coverage. The Kaiser Family Foundation, in its’ January 2018 annual report projected that by the year 2030, Medicare beneficiaries could expect to pay 50% of their health care costs out of their own pockets. This doesn’t even include expenses for long term care, which can easily top over $260, 000 for a couple over 65. Have you planned for out-of-pocket medical expenses in retirement?
3. Failing to factor in the impact of debt. Most retirees with whom I speak say they’d like to spend their retirement years living in their same homes. Unfortunately, though, the number of people over 60 who still have mortgages is growing every year as are the average balances of those mortgages. Making matters worse is the rise in consumer debt. Studies conducted by the Employee Benefit Research Institute have concluded that nearly 50% of households headed by persons 60 and older carry significant amounts of consumer debt. Are you working toward eliminating all or most of your debt before you retire?
4. Failing to understand the “sequence of returns.” A large number of pre-retirees and retirees have their wealth parked in the stock market and mutual funds, thus exposing them to the “sequence of returns.” Simply stated, the sequence of returns is when the market crashes just as you are beginning to withdraw your retirement money. Living for the past ten years in an unprecedented bull market, it’s easy to forget that markets do indeed go down, usually with dangerous consequences for retirees. Just ask the unlucky folks who retired in 2008 just as the S&P 500 went down 37%. Could you survive a 30% or more stock market tumble?
As you can see, it’s easy to overlook or ignore some of the most important things that have the potential to spend your retirement plans. That’s why I recommend having a heart-to-heart with your trusted, safe money retirement planner. He or she can help you avoid these and other mistakes and show you how to create guaranteed streams of income without risk.