A dream all working people share is a secure and comfortable retirement. And we can expect to spend a lot longer in retirement than previous generations. But many people will fail to realize the retirement dream because they didn't take the time to properly plan and prepare. The following list contains 10 of the most common mistakes that can make your retirement years a challenge. Understanding these mistakes will help you assess your own retirement strategy and help you avoid setbacks.
1. No formal retirement plan
The number one retirement planning mistake is not setting financial goals and committing to a plan in writing to achieve them.
Failing to plan is the same thing as planning to fail. If you haven’t already set specific, measurable, financial objectives in writing and implemented a step-by-step plan to achieve them, you are setting yourself up for disappointment.
Fortune magazine published a study that show those with written plans end up with five times more money at retirement as those with no written plans.
2. Not saving enough
You are either saving for retirement today or consuming your retirement today. It is a choice you are making that has profound implications for the last 30 years of your life.
The reality is retirement planning is not a decision of whether or not to consume, but when to consume. Consuming now means you are spending the money that should be used to compound and grow in order to support you later.
The get-started-today solution is to invest as much money in your company retirement plan and IRAs as you can afford. At a minimum, you should invest enough in your 401(k) to get the company's matching funds (assuming they are offered).
3. Failing to start saving early enough
The most valuable asset you have when saving for retirement is time. The more time you have until retirement, the easier the task is to accomplish. The longer you delay getting started, the harder it will be and the greater the risk to your future lifestyle.
It’s not money that builds wealth -- it’s money multiplied by time. Waiting to get started effectively removes time from the equation, and you can’t afford to do that. It eliminates your ability to compound your way to wealth.
4. Retiring with high housing costs
Entering retirement with a mortgage isn’t necessarily a bad thing. Entering retirement with a mortgage, or even a home equity loan you can’t afford, however, is a potential disaster.
A certain amount of debt is manageable, even good, but massive debts such as HELOCs tend to make covering your retirement costs tricky.
Prioritize pre-retirement repayments to reduce your debt to what you can support with retirement income.
5. Relying on Social Security, pensions or earnings
Many traditional defined benefit plans are grossly underfunded, more are being converted to defined contribution plans, health benefits are being eliminated, and Social Security is not enough. How dramatically these changes will affect you is dependent upon your specific circumstances.
The new reality of retirement planning means your role and responsibility has shifted from passive to active. You either get in the driver’s seat to secure your retirement income needs or face an insecure retirement as a consequence.
Your objective should be to work during retirement because it is fulfilling and enjoyable -- not because you have to. It’s a mistake to plan your retirement security so that it’s dependent on earned income.
6. Not maximizing tax deferrals
Anyone not taking full advantage of the savings incentives built into the tax system is throwing away a huge opportunity, and once the opportunity is gone you can never retrieve it. It is a mistake for most people to not max out their government-sponsored retirement plans every year they work.
Even if you aren’t covered by a 401(k) or 403(b), there are a host of retirement plans that will give you some mix of tax-deferred growth and current tax savings. This includes IRAs, Roth IRAs, and many more. You'll need to talk to your accountant or financial advisor about which retirement plans may be right for you.
7. Spending instead of rolling over
Once money is placed in a retirement plan you don’t take it back out until after you retire. Spending it before you retire is an expensive mistake. The younger you are and the smaller the balance you are rolling over when switching jobs, the higher the probability you will violate this simple retirement planning rule.
Remember, seemingly inconsequential dollar amounts when compounded over many years can grow into significant retirement savings. If you pull the money out when switching jobs, it destroys the compounding process. A better alternative is to roll it over into an IRA.
The rollover IRA has advantages. You are taking responsibility for the money which is important long term, but also you will increase your investment flexibility with an IRA and lower the costs associated with managing it.
8. Underestimating health care costs
Smart retirement planning necessitates additional health care planning. There are three major issues to consider regarding health care costs in retirement:
- Early retiree self-insurance: If you retire before qualifying for Medicare make sure you know the cost of self-insurance and can afford to pay it.
- Medicare out-of-pocket and supplemental premiums: Once you qualify for medicare there are still supplemental insurance premiums to consider and out-of-pocket expenses that must be covered. Make sure you’ve built these expenses into your budget and know what to expect.
- Inflation and health care costs: Make reasonable estimates for the rise in medical costs knowing the bulk of those expenses won’t be incurred until many years later in life.
9. Putting your kids before your retirement
Parents want what’s best for their kids -- but when that comes at the expense of their retirement fund, they may need to find other ways to help. Those who put their own savings on hold to help their children with large expenses such as college or rent can set their retirement savings back by years.
The most important thing you can do for your kids is make sure you’re self-sufficient, so you won’t have to rely on them in your eighties for financial support. Take ownership of decisions to find a home or a school within budget. There needs to be balance.
10. Poor investment management
Nothing can damage a retirement plan like bad investment decisions or improper asset allocation and management.
You must earn a real rate of return net of inflation and taxes so that you improve your purchasing power over time or at least preserve it net of withdrawals. This requires you to take risks, but only smart risks.
The costs, fees, surrender charges and other various expenses make investing in instruments like variable annuities too expensive.
Only pay for investment services that clearly add value beyond what they cost.
Summing up, the most common mistakes most people make in their retirement financial plan are avoidable. The keys are to take the planning process seriously and develop the financial acumen to manage expenses, save conscientiously and make wise investment choices.