Saving early for retirement is the best way to maintain financial independence and security later in life. Retirement planning is a necessary and important undertaking, and there are several big mistakes that individuals should avoid, regardless of their age or income level.
According to experts, preventing common mistakes and taking a proactive approach to retirement planning can help you build a solid financial foundation for your retirement years. Here are nine mistakes you’ll want to dodge as you start or continue planning for your life after work.
1. Putting It Off
One of the most significant mistakes one can make is not starting retirement planning early enough. The power of compounding works in your favor when you begin saving and investing for retirement in your 20s or 30s, so waiting until you’re 40 or 50 makes it much harder to accumulate enough savings. Regardless of your age or how much money you make, the time to start planning and saving is today, not tomorrow.
2. No Plan? Big Problem
Whether you’ve expertly managed your career with clear goals and purpose or you’ve flown through your working life thus far by the seat of your pants, making meaningful plans and goals will enable to enjoy the freedom retirement brings. It might sound like more work, but failing to define your retirement goals and lifestyle can lead to inadequate savings.
Additionally, you’ll need to regularly review and adjust your retirement savings and investment strategy as needed to ensure it aligns with your goals and changing circumstances. The clear picture of how much income you’ll need in retirement to maintain your desired standard of living will change throughout your life.
3. Waiting Too Long To Retire
According to Tim Jensen — certified financial planner and founder of Jensen Planning in Denver, Colorado — while putting off retirement can add much-needed income or benefits to your retirement savings, there’s no set retirement age. “Waiting too long to retire makes you miss out on time you could be enjoying your life, and there isn’t always a significant cost benefit to waiting. The timing of your retirement should be based around your savings, goals, needs and priorities — not the date on your driver’s license.”
4. Relying Solely on Social Security
Social Security may not provide enough income to sustain your retirement comfortably and, hence, you should view it as a supplement to your savings, not your primary source of income. Guest writing on the Social Security Administration site, financial guru Suze Orman suggested that not saving on your own is a mistake many people make.
“You don’t have a workplace retirement plan? Then, I want you to save up in a Roth IRA,” said Orman. “If you are over 50 this year you can contribute $6,500. That’s $125 a week. Please take a hard look at all your spending and see if you can free up more money to build a strong retirement fund.”
5. Underestimating Life Expectancy
People (and government agencies overseeing benefit programs) often underestimate how long they will work and live in retirement. Living longer than expected can strain your savings, so it’s important to plan for a potentially lengthy retirement and make sure you have enough savings to sustain you. While Jensen said retirement should be dependent on a number of non-age-related factors, you’ll need to adjust your expectations about retirement depending on the confidence you have in your plan and savings.
6. Ignoring Inflation
Anyone who’s planning for retirement or is already retired worries about running out of money. According to Forbes, “Even for people with the best-laid plans, inflation is an uncontrollable X-factor that complicates retirement planning.” Failing to account for inflation — or overreacting to it by taking unnecessary risks — can erode your purchasing power in retirement. Make sure your savings and investments are structured to keep pace with rising prices over the years.
7. Overlooking Employer Retirement Plans
Many employers offer retirement plans like 401(k)s with employer matches. Not taking advantage of these plans is a missed opportunity to grow your retirement savings. As Jensen noted: “Nearly 70% of private employees have access to retirement benefits, only half actually use them.” Don’t put yourself in the wrong half of that stat. Get caught up on the benefits available to you and get set up a retirement account, whether you’re a rookie or a veteran at your company.
8. Overestimating Income Needs
Can you have too much cash? Of course not. But as Money reported last year, incessant pressure to save is causing many to put away more than they will need in retirement. While it’s essential to plan for a comfortable retirement, overestimating your retirement income needs can lead to unnecessary frugality during your working years. It might require changes to your spending and saving behaviors, but try to strike a balance between saving for the future and enjoying the present.
9. Neglecting Health Care Costs
You might be the picture of health now, but as life spans increase, so do the costs related to medical care and serious health conditions as you age. Not factoring rising healthcare costs during retirement can lead to financial strain. You should always consider purchasing long-term care insurance and budgeting for healthcare expenses after taking an honest look at your personal health risks and your family history. “A rule of thumb for the average person is to save $150,000 to $200,000 for medical expenses alone during retirement,” according to Jensen.
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