How prepared are you for retirement? Do you have an idea of how much money you’ll need? Do you have a pension plan? If yes, do you understand its ins and outs? How about your 401(k)? Your IRA? Or for that matter any other retirement account?
Jerry was a star saver and investor. By the time he was retiring in 2000, according to annuitygattor.com, his portfolio was worth a whopping $ 1.5 million and he was planning to live off a safe 4 percent withdrawal. However, the withdrawal wasn’t quite sufficient to meet his needs. Jerry still owed $ 240,000 in his mortgage, he had a balance for two car payments (his car and his wife’s car) and he took out $ 45,000 to pay for his daughter’s wedding and give her a lavish honeymoon.
Also, he spent a considerable amount on a beach condo in Florida. After just seven years, Jerry was left with a mere 238,000. Considering his mortgage was still outstanding, he realized that he would be broke before his 75th birthday.
Like Jerry, we could have many questions when it comes to planning for our golden years. The main question is, do you have a retirement plan? And, how robust is your plan?
Here are seven of the biggest retirement mistakes to avoid.
Mistake 1: Having No Plan
Here’s an obvious mistake that some think is trivial but it really happens. The days when American workers could rely on company-run pension plans and sit back while someone else calls the shots are long gone.
Today, when it comes to your retirement saving, investing and expenditure planning the buck stops with you. Figuring out how much you need for a worry-free retirement and how to get there is a lot more complicated than what you thought it was. Many baby boomers worked for more than 30 years with no retirement plan only to think about retirement when they turned 55
Having no idea of how life will turn after retirement, and how you’ll sustain yourself is may cause misery beyond your imagination.
You need to have a concrete plan; a plan that factors in inflation as well as other market twists and personal expenditures to give you a realistic picture of how you can maintain your lifestyle in retirement.
Mistake 2: Procrastinating on Retirement Saving
Many Americans agree with the need to have a retirement plan and savings. However, doing it is another hurdle, especially when you’re just starting out in your career. But that’s exactly when you should begin to save.
However, many American workers don’t realize this. According to a survey done in 2014 by the Employee Benefit Research Institute, 36 percent of respondents aged below 40 (probably having worked about 10 years) had less than $ 1,000 in their retirement savings. Many put off saving for retirement until after they hit their 40’s and 50’s.
When you wait until you are in your 40’s or 50’s to start aggressively saving for retirement, you miss out on what Albert Einstein called the eighth wonder of the world, the compounding effect on your savings.
When you start saving early, it means that you’ll have to save less each month and the more you benefit from long-term market gains. In fact, a survey by Bankrate revealed that more than half of Americans aged 50 and older regretted procrastinating on their retirement savings more than anything else.
But there’s some good news for those who started saving a little late and are in their fifties. If you’re saving in an IRA, you can throw in in an extra $1,000 and if you’re saving in a 401(k), you can make $6,000 leaps and cut the gaps to a maximum annual contribution of $24,500 unlike $18,500 which is the maximum annual contribution for younger workers.
Mistake 3: Saving Too Tittle and not diversifying the Portfolio
Still, on the savings issue, another common retirement mistake to avoid is saving too little.
When you are at the prime of your career, it also happens to be the time when you are at the prime of other aspects of your life. You’ll find that your finances are often stretched to the limit, being pulled in different directions.
Paying off a debt may seem more urgent, or funding your children’s education may look like a more important priority. With so many pulls in different directions, easing on your retirement savings contributions may seem like a more sensible solution. However, such a move would have a more severe, long-term negative effect.
Saving too little is a mistake that significantly derails you from hitting your target figure especially if you didn’t start early.
On the other hand, not diversifying your portfolio is due to a conservative mentality would cause you to shy away from investing in higher risk portfolio like stocks. However, the cost of such a move is low returns on your portfolio which may not keep up with inflation, a retirement mistake you can easily avoid.
Mistake 4: Not maximizing on Tax Incentives
In a bid to encourage sound retirement planning, Uncle Sam has gone out of his way and become extra generous with a variety of tax incentives. If you’re not making the most from these tax incentives it’s a mistake.
For instance, unlike younger Americans who’s out-of-pocket medical costs deductions are capped at 10 percent of their adjusted gross income, the IRS lowers the floor for taxpayers above 65 to expenses that surpass 7.5 percent of their adjusted gross income. Also, if you are looking to downsize and have lived in your home for more than two of the last five years, you can sell your current home virtually tax-free.
The limits may be very stringent but still, very generous. If this downsizing involves getting rid of one car, you can give it away in a charity and deduct the fair market value from your taxable income. But before you do that, ensure you are familiar with the limits.
Not taking advantage of these and many more tax incentives will cause you to lose out on cash and Uncle Sam’s rare generosity.
Mistake 5 Underestimating Health Care Costs
A recent study by Fidelity Investments showed that a healthy couple can expect to spend well over $ 275,000 in healthcare costs post-retirement.
Many people underestimate health care costs in retirement. Some think that they are made of iron, so they’ll not need healthcare. Others think that they can rely on Medicare to solely take care of their healthcare costs in retirement. Medicare covers only up to 80 percent of your health care costs and if you retire before you hit 65, you won’t be eligible for Medicare. You’ll have to pay for your medical costs out of pocket.
Struggling with high health care costs is a retirement planning mistake you can avoid. You need to identify the best ways to anticipate and pay for your health care in retirement through appropriate insurance and saving. Learn how Medicare works, set up a health savings account and plan for long-term care.
Long-term care can sabotage your retirement nest egg. The average cost of assisted living can cost up to $ 45,000 annually, and if you go for a private room in a nursing home, it’ll take out a staggering $ 97,000 from your retirement nest egg each year. Check out the different rates for assisted living on Caring.com and make an informed decision.
Mistake 6 Having a Grand Retirement party
Having a retirement party is not a bad thing. However, going overboard with the expenditure, especially if you are the one picking the tab is a retirement mistake to avoid at all costs.
But it’s not just about a grand exit party, the same applies to other lavish expenditures often justified with the words “I deserve it.”
Sure, you may deserve a trip to the moon, but, can you afford it?
Many retirees make the mistake of hosting grand parties, buying new and expensive vehicles, or taking out loans on their retirement savings to go on expensive vacations. But they don’t realize that it is putting money on non-priority issues and chances are such a move would cause them to outlive their savings.
We agree you deserve a vacation, but, before you spend a significant amount of your precious retirement savings, check out HomeAway for affordable vacation rentals.
Mistake 7 Having the Delusion that You’ll Work Forever
Work is fun. Sure it gets you tired and sometimes stressed out, but, it brings in a pay and keeps you active –whether mentally or physically. But work also requires youthfulness and good health.
Don’t make the mistake of thinking that you’ll work perpetually, even if it is working in your own business. Consider this: according to the US Department of Labor Statistics, although the number of people aged 65 and above who are in employment is on the rise, it is still under 20 percent and no significant changes are expected in the coming decade.
Many are forced to stop working due to a health condition or are declared redundant by their employers or are laid off during downsizing and buyouts.
So, working beyond your 65th birthday may not be entirely within your control, and relying on your business for retirement may not be the best option. However, there are many creative ways to keep busy and get paid even after your retirement. This article will help you find out creative ways you can make money even after retirement. But avoid the retirement mistake of making these sources your primary income.
In conclusion, these retirement mistakes may be common, but you can avoid them. Get in touch with a Blooom for the best management of your 401(k)