Setting up a plan to fund your retirement is only the first step to living well in your golden years. You must monitor and regularly adjust your plan to ensure that you are generating enough savings to live comfortably. Here are seven red flags that your plan might not get you where you need to be at retirement.
1. Lacks Automated Savings
If you fund a retirement account sporadically, you might not accumulate what you need to retire. According to Daniel S. Miller, certified financial planner and president of Miller Financial Group, “Making savings an automated process coming directly from your payroll, or checking account, will force you to have the discipline to save.” Once the discipline of having money drawn directly from your payroll or checking account becomes a habit, you are less likely to miss the funds that have been taken out of your account. Then you will be adhering to the old adage of, “Pay yourself first.”
What to do: If you are not already automating your retirement savings, do so, and the sooner the better. Cultivate the habit of paying yourself first by deducting funds for your retirement account before any other expenses are deducted from your paycheck. You will find it easier to adjust to living on the balance of what’s left.
2. Missing a Long-Term View
A retirement plan is by definition a long-term plan. Don’t let greed and fear derail it. Elle Kaplan, CEO of LexION Capital Management, said, “One of the biggest mistakes in retirement planning is adopting a short-term view.” With the barrage of news on the financial markets in general and the stock market in particular, many people are tempted to react hastily to every downturn in the market. The time to be out of the market, Kaplan said, is usually not during market downturns because “despite choppy seas and times of increased volatility, historically, the stock market is trending upwards.”
Moreover, an investor who chases returns in his retirement fund is likely to see poor returns overall. Bob Gavlak, CFP and wealth advisor with Strategic Wealth Partners in Columbus, Ohio, said, “While getting an acceptable rate of return is important, too often investors chase returns in ways that are very detrimental to their retirement.”
What to do: If a review of your retirement account shows overtrading and poor returns over time, then plan on seeking the help of a fiduciary to help you plan for retirement.
3. Skews Way Too Conservative
With markets being so volatile, it’s tempting to want to keep most of your retirement assets in conservative asset classes such as cash or certificates of deposit. But these products are likely to underperform the market and not keep up with the rate of inflation. Depending on the number of years you have until retirement, you should plan on a portfolio allocation with a mix of stocks and bonds. The younger you are, the more risk you can be exposed to and therefore the higher your stock allocation, experts say.
Even people who are close to retirement should not be too conservative with their retirement assets. Gregory J. Kurinec, certified estate advisor at Bentron Financial Group, Inc. said that with people living longer, they “must plan for 20- and 30-year retirements.” That means that even a 60-year-old retiree should not put all of his retirement assets in CDs and other bank products because it ups the chances that you will run out of money before your death or struggle to maintain your standard of living.
What to do: Make sure that your retirement plan exposes you to an optimal mix of fixed income and stock market investments for your age. If you need help, seek the guidance of a financial planner, preferably one with the CFP designation.
4. Needs More Contributions
Americans are living longer. According to a study on mortality in the U.S. by the Centers for Disease Control and Prevention’s National Center for Health Statistics, life expectancy is rising. The average life expectancy for women is 81.2 years, whereas for men it is 76.4 years. This means that your retirement funds should last a minimum 20 years.
Indeed, with more people living longer than these averages, factoring in a span of 30 or 40 years is not unreasonable. Based on these numbers, many people are not saving enough for retirement. “One of the worst mistakes people make when planning their retirement is not saving enough,” said Wilson Moy, director of planning and senior trust officer at AAFMAA Wealth Management & Trust, LLC said. “When one retires happy and healthy at age 62 to 65, they typically maintain a similar active lifestyle with travel, entertaining, dining out, etc., for another 10-15+ years before spending slow down. When the earned income stream ends, sufficient asset base is required to maintain that lifestyle and provide for medical/care needs down the road.”
What to do: Be sure to maximize contributions to qualified plans and save after-tax dollars as well to enjoy retirement.
5. Hasn’t Been Updated or Rebalanced in Years
Many people have retirement plans they have been holding onto for years — maybe even decades — with the same allocation of stocks and bonds that they started with. And often there’s too much company stock from a former employer. “Many employees have a significant portion of their portfolio invested in company stock, often due to company match programs for retirement contributions,” David Walters, CFP, certified public accountant and portfolio manager with Palisades Hudson Financial Group, Portland, Ore., said.
“Some employees maintain this exposure over long periods of time … because they are familiar with the company or simply feel some obligation to maintain positions in the companies they worked for,” Walters added. “This leads to overexposure to the unique risks of a single company and can greatly increase the risk of the portfolio.”
What to do: Rebalance your portfolio regularly to ensure your asset allocation is optimal for your age and risk level, Walters said. “Where possible, allocations to any single company should be minimized in favor of a well-diversified portfolio with exposure to many companies and asset classes.”
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6. Fails to Factor in Rising Health Care Costs
Underestimating future health care costs is another red flag to a bad retirement plan. Nathan Garcia, CFP and managing director of Westbourne Investments in Alexandria, Va., said, “Health care costs are increasing at about 6.5 percent year over year. HealthView estimates that a 65-year-old couple will spend about $395,000 on health care over their lifetime. Meanwhile three out of four 65-year-olds will need some form of long-term care that could easily run $90,000 or more per year if facility treatment is required.”
What to Do: A qualified retirement financial planner can help you conduct a thorough analysis of maintenance costs, insurance premiums, co-pays, deductibles, prescriptions and estimate possible long-term care expenses to help you better prepare for retirement.
7. Doesn’t Cover Early Retirement
Robert R. Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pa., said that one of the worst mistakes people make in financial planning for retirement “is assuming they can plan their retirement date with some degree of certainty.”
“Research from the Employee Benefit Research Institute shows that 49 percent of retirees left the workforce earlier than they had planned,” he said. “Retirees noted that they were forced to retire [early] for health reasons, downsizing and the need to care for a spouse.”
What to do: “People planning for retirement should leave some margin of error in accumulating sufficient retirement savings,” Johnson said. Planning to retire at 65 might actually mean retiring at 62 years or younger. “Accumulating more savings than needed is prudent.”