How To Avoid Large Financial Mistakes: Retirement Planning
Think you’re ready for retirement? Think again. People today are living longer and leading more active retirement lifestyles than in the past – so they may need to set aside more money, and invest differently, than they had planned. Avoid these seven common mistakes people make when planning for retirement.
1. Thinking it’s too late to start planning.
Once you reach your 50s or 60s, it may seem too late to start investing. After all, how can you accumulate enough money to make a difference when you retire? But thanks to the power of compounding, boosted by the tax-deferred growth offered by individual retirement account (IRAs), 401(k) plans, and annuities, it may not take as much as you think to build up a nest egg. So don’t get disappointed, especially when you continue to the second common mistake coming right up. A little planning goes a long way for what is hopefully a lengthy retirement.
2. Underestimating your life expectancy.
You may think you know how long you’ll live in retirement – but as life expectancies increase, you may need to plan for a much longer retirement than you initially anticipated. Almost 20% of workers expect their retirement to last 10 years or less, while an additional 15% expect their retirement to last 11 to 19 years. But according to the 2000 Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI), half of the men reaching age 65 have an additional life expectancy of approximately 17 years, while half of the women reaching age 65 have an additional life expectancy of approximately 21 years.
3. Not calculating your savings needs.
Most financial planners will tell you to plan on needing 60% to 85% of your pre-retirement income in your retirement years. But can you really predict how much you’ll need based on general percentages? According to the EBRI survey, only 53% of workers have tried to determine how much money they’ll need to save by the time they retire. But half of the workers who did try to estimate their retirement needs increased their investments or changed their asset allocation as a result of their calculations. That suggests many people may not be correctly estimating their retirement needs. But thanks to software and online calculators, it’s easy to do so. My personal favorite, check out: http://www3.troweprice.com/ric/RIC/
4. Not taking inflation into account.
Many investors, particularly older ones, are uncomfortable with market volatility. As a result, they invest solely in Treasury bills, fixed-rate CDs, and savings accounts. Doing this could potentially eat away at most of their investment return, as these vehicles tend to return close to or less than inflation. As you approach retirement – and even in retirement – it’s important to consider keeping some money in growth investments such as conservative stock mutual funds.
5. Putting other financial goals first.
Retirement probably isn’t your only financial goal. You may also be saving for your children’s or grandchildren’s college education or buying some nice gifts for the kids. These are all important, but don’t place them ahead of a financially secure retirement.
6. Failure to Diversify.
If you ever lost a lot of money in the market, it could only mean one thing: you weren’t diversified. In a well diversified portfolio, while various slices of the portfolio go up, others go down. Recognize no one is ever perfect and it’s nearly impossible to have a portfolio where everything is going up at the same time. Good diversification takes prediction and emotion out of the equation, which usually translates to better success. Rebalance at least twice a year, and this along with a diversified portfolio means you’ll be far ahead of many others trying to predict. To better understand diversification, check out www.callan.com/resource and take a look at the “Callan Chart.” Here, a picture is worth a thousand words.
Certainly, there are more “mistakes” people make, but these are the ones I consider to be the most common. Paying attention to the details is where retirement success takes place, and for your journey ahead, I wish you all the happiness life has to offer.
For more information, visit www.alanhaft.com