Seven Common Retirement Mistakes Spotted by Financial Planners
Watch the sunset on the beach every day. Take a cross-country journey whenever you want. Finally, devote time to the hobby that you dreamed of turning into a full-time job. If you are like many people, one or all of these are things that you will want to do in retirement someday. And to help turn those visions into reality, you are likely contributing to a 401 (k) or IRA, hoping that all-inclusive growth will help you build a nest egg large enough to make those dreams come true.
This post was originally published on LearnVest .
But preparing for retirement doesn’t stop with saving. There are many moving parts that will affect how you plan your post-work years and are easy to overlook – just ask these personal finance professionals who share some of the biggest mistakes they’ve seen when people committing comes to retirement planning.
Keep your head in the sand
Talking to thousands of pre-retirement retirees each year, I see the impact of planning – not planning – retirement on a daily basis.
I can say that one of the biggest obstacles to adequate savings for retirement is the fact that retirement is easier to ignore than to face it: most people spend a lot more time planning family vacations than planning their financial future! After all, planning a family vacation is fun, but planning for retirement can be daunting and difficult, and people are often afraid to make the wrong decision.
But when I meet people approaching the retirement window, the most common theme I see is painful regret that they didn’t take action at an earlier age to meet their financial goals. Here’s the reality: giving up a decision is a decision, it just doesn’t work. If you think it’s bad to feel overwhelmed now, imagine how overwhelming it would be that you don’t have enough money in retirement to pay your bills, buy medicine, or live the lifestyle you’ve been saving your entire life on.
Action is the key to overcoming the overwhelming majority. First, define success, that is, what do you want and when do you want it? Then determine the path you are willing to take to get there. Once you have clearly defined goals, saving for retirement doesn’t seem like a big deal. ”- Chris Kovalik, Federal Pension Expert, ProFeds, Chicago.
Overly optimistic or pessimistic about retirement
Sometimes people find it difficult to realistically assess their financial situation, and they have either accumulated too much or too little, but have no idea what it is. I have had clients who do not have retirement savings, investments or retirement, and they swear that in six months, when they turn 62, they will be able to retire, buy whatever toy they dreamed of, travel the world and live in her. glory – no matter they live on social security, their home is fully mortgaged and their business or work will not generate any real retirement income.
It’s the same in the other direction, where clients insist that they will have to keep working after retirement – that even with their giant nest egg, great retirement, or whatever other resources they have, they seem to be cannot accept that they will be able to stop working, or at least work a little less. I think often when you see these situations it has to do with an emotional cause or something deep in their history. For this reason, I don’t think data, graphs or charts really help unless I use them to improve the conversation. So I try to make them understand their situation by asking deeper questions and listening to their answers without judgment. – Scott Vance, Financial Consultant, Trisuli Financial Consulting, Raleigh, NC.
Lack of a diversified portfolio
Many employees have a significant portion of their retirement portfolio invested in the stocks of their own companies. Some employees retain this exposure for long periods of time, often before retirement, because they are familiar with the company or simply feel a certain obligation to maintain positions in whoever they work for. But this kind of overexposure can significantly increase a portfolio’s risk.
If you only own one share and something bad happens to that particular company, then the value of your retirement portfolio will suffer a lot. This is the same as putting all your eggs in one basket. To help control the investment risk in your portfolio, where possible, you should minimize the allocation to any individual company in favor of a well-diversified portfolio across many companies, industries and asset classes. – David Walters, CFP®, Portfolio Manager, Palisades Hudson Financial Group, Portland, Oregon
People tend to underestimate the impact of taxes on their retirement income because they just don’t think about it. They usually contribute to the traditional 401 (k) at work, which means they don’t pay income tax on that money, and it grows tax-free. But when they start receiving payments, which they can do after age 59½, the IRS will tax them whatever they receive at the regular tax rate. So if their tax rate is 25%, their 401 (k) is only 75% as valuable as it sounds. And this is without taking into account inflation!
To minimize the impact of taxes, I recommend that clients I work with also consider investing a portion of their after-tax income in tax-free retirement funds. Paying tax on money before it grows is less painful – think of it as paying tax on seeds rather than on crops. Then they will have taxable and tax-free baskets from which they can draw money, balancing their tax liabilities later. ” Tracy Lawrence, retirement consultant and founder of Grand Family Planning LLC, Ringwood, NJ.
Assuming you can work until old age
Many people feel that they can simply take advantage of the opportunity to work longer if their savings are insufficient. People have this mentality because Americans are living longer, but it doesn’t match what is really happening. In fact, a 2014 Gallup poll found that working Americans expect to retire at 66, but found that the median age of retirees is 62.
What people don’t realize is that Americans often live longer, but not necessarily better. They may be forced to retire before they are ready because of their health or the health of a loved one, downsizing and mergers, or business failures. I tell clients this: If possible, make sure you have a cushion in your retirement plans so you can cover an involuntary retirement earlier than planned, or live longer than the actuarial average. You can save more than you need, but this circumstance is much better than the lack of savings and the need to significantly reduce the standard of living in retirement. – Robert R. Johnson, President and CEO, American College of Financial Services, Bryn More, PA
Lack of accounting for medical care as a basic retirement cost
Many retirees are unaware of the high cost of potential health care costs that they may have to plan for throughout their retirement. According to one HealthView Services estimate , couples retiring in 2015 may have to spend between $ 266,000 and $ 394,000 on medical care over the course of their retirement. These numbers are shocking!
What’s even more shocking is the number of people who do not adequately consider health care in their retirement plans. I emphasize to my clients the importance of understanding three main factors that can affect their own spending: When do you plan to retire? What is your health condition? And how long do you think you can live? – Ronn Yaish, Welfare Advisor, Yaish Financial, Bergenfield, NJ
Excluding long-term care
When you are young and healthy, it is easy to overlook what can happen to your health as you age. Thinking about getting sick or even becoming disabled is dull, so it’s no surprise that many people overlook long-term care. If someone you know did not need long term care, you would be surprised how much health care and nursing homes cost, and Medicare and health insurance plans do not cover long term care.
My advice: Consider long-term care insurance. A typical policy helps pay for adult day care, temporary care, admission to Alzheimer’s, nursing homes, nursing homes, and hospices. It also typically includes home-based services such as skilled nursing care, rehabilitation therapy, and personal care such as bathing and dressing. – Patty Cathy, Investment Advisor, Smart Retirement LLC, Denver