Retirement planning mistakes to avoid
By Stephen High
Life is all about balance. You want to enjoy life along the way, but it’s vital to set aside resources for what lies ahead. Mistakes made in preparation for your retirement years can be particularly damaging since you may not have the necessary time horizon to correct them. This article discusses several retirement mistakes to avoid so you can maximize the enjoyment of your twilight years.
Failing to plan
The first mistake investors make is failing to plan. If you fail to plan, you plan to fail. Fewer than one in five people over age 50 have successfully created a retirement plan. Only one in three pre-retirees has a plan for how much money they will need in retirement. Furthermore, 45 percent of households with couples ages 51-58 are at risk of maintaining their standard of living in retirement.
Ask yourself these questions. Do you have a written retirement plan? If so, what are your goals in retirement? Do you know how much you need to save to retire in the lifestyle that you desire? To answer these questions, start with the end in mind. You will need to decide when and where you want to retire. You will also need to project your retirement expenses and identify the sources and amounts of your retirement income. In addition, you will need to estimate your life expectancy.
Underestimating the amount of savings needed
Since most investors do not have a plan, it’s not surprising that 36 percent of Americans have no retirement savings. The average savings of a 50-year- old is $43,797. Eighty percent of people ages 30-54 believe they will not save enough for retirement. For an income need of $6,000/month, you will need over $1 million saved to cover 20 years of retirement. You will need to save over $1.3 million to cover 30 years of retirement.
Failing to understand the risks of inflation
One often-overlooked mistake is underestimating the effects of inflation. With a 3 percent inflation rate, in 20 years your buying power will be cut almost in half. For example, if your projected annual retirement needs are $80,000 today, you will need more than $145,000 annually in 20 years to have the same purchasing power. Don’t let inflation ruin your retirement dreams. You will need the right investment strategy to outpace inflation.
Underestimating your life expectancy
Not surprisingly, people are retiring earlier and living longer today. In 1950 the typical retirement age was 70 years old. Today it is 62 years old. A 65- year-old man has a 30 percent probability of living to age 90 while a 65- year-old woman has a 40 percent chance of living to age 90. One member of a 65-year-old couple has a 60 percent chance of living to age 90. The longer you live, the greater the probability of running out of money. Given this reality, you may need to re-evaluate when you can retire, how much you need to save before retiring and how much you can withdraw from your savings during retirement.
Underestimating healthcare costs
A recent Fidelity study concluded that most people underestimate the cost of healthcare in retirement. According to the study, a 65-year-old couple can expect to pay more than $225,000 in healthcare costs in retirement. It is estimated that a couple has a 50 percent chance that one spouse will have long-term care needs costing more than $150,000. There are no great answers here; however, you should start saving more to cover likely healthcare costs. If you have not done so already, you should consider buying long-term care insurance.
Conclusion
Don’t make the mistake of not taking retirement planning seriously. Set your retirement goals, and get help developing a plan. We can help you. Just give us a call. An initial consultation is free so you have nothing to lose by talking with one of our professionals.