7 Mistakes To Avoid When Planning For Retirement
Updated for 2021
Your retirement years may seem far off but that does not mean they are not very important right now. Preparation is key if you do not want to be living solely off your social security when the time comes.
Below are seven mistakes to avoid when it comes to planning for your retirement.
1: Focusing only on the present
With yoga and meditation all the rage, people are living more mindfully and in the present moment. This is great, but you also cannot live solely in the moment. Setting up a plan for your future is important, even though it may be years away. When you do retire, you will be living off of whatever assets you accumulated during your working years. The key here is to try and imagine what you see your life looking like at that time. Where and how do you want to live. By doing this, you will have a better understanding of how you need to do things now, so you are living the life you hope for when the time comes.
2: Thinking you are too young to start saving
When it comes to saving for retirement, now is the right time. Whether you are 25 or 55, it is never too late to start saving. Of course, it goes without saying that the younger you start the better. If you think about it, you could live upwards of 30 years in retirement. Saving enough money for that time, especially when you account for inflation, is a huge task that you need start now.
You want to get started by putting together a detailed retirement plan that includes how much you want to be able to spend, where you will live and when your SS benefits will start. This is a practice you should be doing on a yearly basis until you are in your forties. After that, you should move it to quarterly.
3: Not knowing how much you need to save
There is a large chunk of Americans that do not have a clear idea of how much they should be saving for their retirement years nor do they have a strategy in place. How much you save depends on various things. How old you are, when you plan to stop working, how long you might live as well as how much money you want to have access to for spending.
Using a good retirement calculator can help you get a ballpark range but financial advisors say 10-15% of your income is a good start if you are in your twenties. If you are older then that number is going to go up.
4: You aren’t increasing your savings amount each year
At this point, we hope you are already saving for retirement. With that being said, you need to remember to give that number a boost each year. You should also make sure to increase it if you get a raise, tax return or any other windfall of cash.
5: You do not have an emergency fund
Many Americans today do not have enough money saved to cover a few hundred dollar emergency. Not having some emergency cash on hand can snowball into debt and on the extreme end, bankruptcy. You should strive to have at least 3-6 months of income stashed away. If this is too hard, putting away something regularly can still be helpful.
6. You are not clear about healthcare costs
Even though there is Medicare in retirement, out of pocket expenses are continuing to go up and that can really eat away at your retirement savings. Aside from that, you may find yourself needing long term care insurance which is another expense. Health care costs are really a big potential risk for retirees so it is important to get a handle on how to plan for it. You want to know how the system works and what you will need to do to manage your money to include this. The main takeaway is to not wait until retirement to figure this one out.
7. Spending too much money at the beginning of your retirement
When people retire, some have the tendency to get a little over excited and they end up spending more than they should the first few years. They basically give in to splurging on all those things they had been waiting to do. Whether it is travelling or fixing up the house. The next thing you know, they look at their budgets and they have gone above and beyond.
The key to finding a balance between things you want to do and not overspending is to come up with a long term budget and stick to it. Try and think about all the things you want to do like travel, hobbies etc and incorporate them into the budget. You then want to track your spending to see what you need to cut back on. Perhaps it is eating out less so that you have more money to put towards your favorite hobby. Cars are another big expense. Perhaps you can get away with using one. People tend to underestimate how much it takes to keep up with a car including insurance, gas, repairs etc.
8. Take advantage of provisions
If you are an empty nester or have received a boost in salary, be smart about how you use that extra money. You could put that money towards “catch-up contributions.” If you are 50, you can now contribute up to $26k into your retirement account. This is $6,500 more than what you would have been able to contribute at 49. Also, you should already know if your company does a 401k match and definitely take advantage of it.
9. Investing in Yourself First Not Your Children
Every parent wants their child to succeed in life but if you are putting all your finances into your child, you are making a mistake. Most of the time this looks like paying for college. Although it is a nice idea, if you are funding their college education over funding your retirement, you will have trouble reaching your financial goals.
10. You dip into your retirement money too early
The whole point of a retirement plan is to make sure you are provided for adequately when your working years are behind you. For this reason, you should stay away from withdrawing any funds prior to 59½. If you do, you will bew hit with a 10% penalty on whatever amount you withdraw in addition to the income tax on that amount.
Make Saving For Retirement a Priority
You are never too late to start saving for your retirement years. It may seem like an overwhelming task to plan out the next thirty plus years of your life but you do not have to do it alone. There are financial advisors out there to get you on the right track.