Our clients ask us a multitude of questions regarding what to do when it comes to retirement planning. They want to know how much to save, where they should invest and what they should do now to prepare for life without a steady paycheck.
But just as important as considering what you should do before retirement is understanding what you shouldn’t do — what we call the retirement planning pitfalls. These are costly decisions that can be easily avoided, as long as you know how.
Retirement Planning Pitfall #1: You haven’t determined how much income you’ll need in retirement.
This particular pitfall gets to the heart of why financial planning matters: You must understand how much money you need to live now in order to understand how much you need to live in retirement. The scary fact is many of us are heading into retirement blind.
According to the 2019 Retirement Confidence Survey, less than half of workers 55 and older had put together a rough estimate of what their costs will be in retirement — and by extension, how much they’ll need to have saved. There was also a huge disconnect between the expectations of retirement income and the realities: While 80 percent of workers expect income from working to be a significant source of income in retirement, only 28 percent of retirees say working provides a notable contribution to their retirement income.
If you don’t know how much you’ll need in retirement, or if you don’t have a good understanding of what income to expect, you run the risk of falling short on what you need to live. Or, on the other side of the coin, if you don’t understand how to budget during your retirement, you run the risk of overspending right out the gate. And trust us when we say that income is much harder to come by in your retirement years.
A great way to get started understanding your retirement needs is by developing a Situational Investment Plan that is tailored to your lifestyle.
Retirement Planning Pitfall #2: You file for Social Security too early.
Most people know they can begin drawing Social Security payments as early as age 62. The allure of more money in your pocket can be tempting, and some people think taking benefits as soon as they can is their best move.
On the other hand, the longer you wait to claim your Social Security benefits, the larger your monthly payment. For every year you wait between 66 and 70, your Social Security increases 8 percent. That’s not a bad return on investment.
Now, many people will argue in favor of filing early simply because they don’t know how long they will live, and they want to get as much of their Social Security as possible. We understand that. You’ve been paying for this benefit you’re entire working life, and you want to reap the rewards.
But it’s important to keep in mind that the average retirement lasts 18 years. Many of us will live much longer than that. That means a higher Social Security payout may be worth the wait. Determining the optimal time to take your benefits can be tricky. We recommend enlisting the help of a CERTIFIED FINANCIAL PLANNER™ (CFP®) to determine your best course of action.
Retirement Planning Pitfall #3: You don’t plan for higher health care costs
We’ve got a sobering statistic for you: A recent survey from Fidelity estimated that a typical 65-year-old couple that retires in 2018 will need $280,000 to cover their health care expenses in retirement. If that took you by surprise, you’re not alone. According to the 2018 Retirement Confidence Survey, 44 percent of retirees said their health care bills were higher than anticipated, and 26 percent said the same about long-term care costs.
Part of retirement involves getting older and, unfortunately, declining health. That should be factored into any financial plan you create for your retirement. None of us can predict the future, but the biggest retirement planning mistake you can make is not preparing for it. A CFP® can provide data and analysis that will help you in estimating your healthcare costs as you age.
Retirement Planning Pitfall #4: You don’t start saving early enough
Maybe you’re waiting for that next big promotion. Or perhaps you’ve earmarked the end of child care expenses as your time to really dig in and start saving for retirement. Whatever your reason, you’re waiting, and that will cost you.
You need time to save for retirement — particularly one that could last 20 years or more. And you need time for the money you sock away to earn interest and grow into the nest egg you need to enjoy your golden years.
So, no matter where you are in your career or what you’re earning, you need to sit down with a CFP® and put a plan in place to start saving for retirement now. Even if you’re starting small, you’re still saving. And that’s what matters.
Meld Financial has developed a proprietary methodology called Situational Investing that starts with developing your Situational Investment Plan (or SIP for short). If you are looking for assistance with your retirement plan, feel free to contact us. If you’re more of a ‘do-it-yourselfer’ or if you just want to learn, be sure to visit Meld University for more useful information and in-person classes designed to help you plan for retirement with confidence.