As we approach our 50’s we may begin to eye the “finish line” of retirement more often. We all know the "common rules of retirement". However, during times of market volatility, many investors may begin to panic and overthink their strategies.
Some experts have seen investors destroy their savings in the blink of an eye with a single mistake.
As the markets trend up and down, it is important to stay on course and plan appropriately. Nothing can replace financial education and strong planning as you approach the golden years.
To help with that, here are the ten most common mistakes you must avoid:
1) Not Planning at ALL For Your Retirement
The most common mistake investors make is failing to plan and set goals for their retirement. According to a study by the Economic Policy Institute, only half of the families in the United States have any retirement savings. A 2017 Retirement Confidence Survey, found only 41% of Americans said that they or their spouse had taken the time to estimate how much money they'd need in retirement. That is scary.
Although the topic of retirement savings can be stressful, address it early and often. Even if you already have a 401K or IRA set up, regularly re-evaluate your savings and investment plans.
2) Getting Blindsided With Natural Inflation
The U.S. inflation rate averages 2-3% per year, which seems small, but quickly adds up. For example, say you're 40 years old and have $50k saved for retirement. By the time you turn 65, with an inflation rate of 2% per year, that $50k will only be worth around $30k. Once you turn 80, that $50k will only be worth $22k.
The best way to plan for inflation is to start with a retirement budget. Estimate what you are currently spending each month and then forecast this 15-20 years ahead while factoring in inflation. There are [various calculator tools] available to assist you. Estimate various inflation rates to have an idea of best and worst case scenarios. Remember, early planning can often mean early retirement.
3) Taking Heavy Debt With You Into Retirement
Debt creates a major threat to a retiree’s financial security and peace of mind. Once you retire, your income is typically reduced to a fixed level, which comes from social security and other retirement savings that have been built over the years.
Carrying debt into retirement can quickly deplete your savings and greatly hurt a comfortable retirement plan. Many turn to debt consolidation advice and programs to resolve heavy payments they may owe.
4) Collecting Social Security.. At The Wrong Time?
Many soon-to-be-retirees think they can start collecting Social Security benefits at any old time or as soon as possible. This is a poor strategy for getting the most out of this program. Instead, find options fit to your specific financial needs.
For example, did you know you can increase or decrease your benefits by starting to collect Social Security sooner or later than your "actual" retirement age?
Suppose a retiree was able to retire at age 66 and holds off taking any benefits until they are 70 years old. This retiree could receive an 8% credit, times the number of years that they waited (4), means the total benefit could be 32% higher than what they would have received at age 66.
With a little research, you may end up with $1000s or tens of $1000s more than you expected. What a difference that will make!
5) Not Considering A Reverse Mortgage
10 years ago, Reverse Mortgage Loans were considered an option of last resort. But today, with stronger policies and protections, they have become an income planning tool for some or a lifeline for others.
Some benefits of a reverse mortgage include access to cash, eliminating a mortgage payment, sustaining retirement savings, and the ability to stay in your own home during retirement.
It’s always important to do your research and careful comparisons when considering a reverse mortgage.
6) Underestimating Long-Term Healthcare Costs
Everyone knows health care is very costly, but the U.S. Department of Health estimates that around 70% of Americans turning 65 will need long-term care at some point. Even worse, those who will require such care will pay on average $138k to cover those expenses.
Although there is no way to know exactly how much you'll need, research and understand long-term health care cost estimates, and build up a healthy saving. It is also helpful to stay active and have regular checkups to stay on top of your overall health.
Long-term care insurance is also an option, but it can be pricey. While long-term care insurance rates have a wide range, usually the earlier you sign up, the better rate you can expect.
In short, good research while maintaining your health will help you avoid this common retirement planning mistake.
7) Not Protecting Your Home From Unexpected Costs
If you live in an older home, the cost of maintenance and repair could grow significantly with time. These expenses add up quickly. You may find yourself using up your savings for travel and relaxation on sump pumps and washing machines.
A Home Warranty Plan can help to preserve your retirement savings and provide peace of mind over larger unexpected repairs and home fixes. It’s important to review any coverage plan in detail to ensure its a good fit for your needs. But when used appropriately they can help keep your nest egg healthy and untapped.
8) Not Realizing How Long Retirement Could Last
It is important to plan how many years you will be retired and how much money you will need in each year to live comfortably.
Consider at which age you plan to retire and your overall health status. Most financial planners say a good rule of thumb is to use 95 years old as a conservative estimate, so plan accordingly.
Once you do retire, it's also good to do a yearly check in on your budget and savings. Are you on track or spending as much as you had planned? Are your investments too conservative or too aggressive? Feel free to make adjustments and discover 5 easy way to add to your income and boost retirement savings.
9) Living in More Home Than You Really Need
Big houses are expensive. In addition to a mortgage, there’s property taxes, insurance, heating and cooling, yard maintenance, house maintenance, cleaning, gas and electricity, furniture and appliances.
Even if you have paid off your home or are close to paying it off there are many other hidden costs that can eat at savings. It is very common for soon-to-be-retirees to continue to sink costs into a home that cuts away at their potential retirement savings.
Everyone’s financial situation will be different but if you find yourself sinking money into your home, it may be a good plan to consider a smaller option with less expenses.
10) Assuming Social Security Will Cover Everything You Need in Retirement
Another common mistake retirees make is believing that the Social Security benefits you'll receive at retirement will be enough to support your lifestyle. The average Social Security retirement monthly payout is around $1,400 which comes out to about $16,800 per year. These figures will vary depending on your income but not by much.
Would this annual value be enough for you to maintain your current quality of life? For many it may fall well below, which is why it’s important to have a supplemental investing plan that can ensure comfortable retirement.
There are many ways to misstep while saving and planning for retirement. The unknown variables that could play a factor are significant. The best strategy for avoiding these mistakes is to prepare early and often. The more planning and preparation you take the better off you will be years down the road. Finding reliable resources and information can aid you in your drive to the retirement finish line.
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