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7 Retirement Planning Mistakes That Will Ruin Your Savings

7 Retirement Planning Mistakes That Will Ruin Your Savings 1 Comment
retirement planning mistakes

Saving and planning for retirement is a journey that can take several decades. During this time, you are likely to get comfortable when you think you have saved enough. However, some retirement planning mistakes may make your retirement life worse off. A report by National Institute on Retirement Security revealed that most retirees are unprepared for the retirement life. With a median of $120, 000 in savings, an average retiree is unlikely to sustain a 30-year retirement life.

Retirement planning mistakes that will ruin your savings:

1. Failing to Save Enough

Many people head into retirement with fewer savings than they would like. These savings are unlikely to meet their daily living expenses and health care costs. Retirees make this mistake by either saving too little or starting too late. But, how much is enough? It may depend on your lifestyle and the cost of living. You can use a free savings calculator to see how much you need to save.

Supposing you start working at 25 years and retire at age 65, you should save for at least 30 years in retirement. For every year worked, you should cover three-fourths of expenses in your retirement. To be on the safe side, save more money than you would need. Instead of saving 10% of your income, you can increase this rate and forego some of your current expenses. You need to save approximately 70 to 80% of the income to live the same lifestyle in retirement.

2. Too much Debt

Going into retirement with large amounts of debts is not only risky but also a big financial mistake. Unless you are earning investment income with a higher interest rate than the debts, you should be worried. High-interest debts such as credit card debts should be paid as quickly as possible. As a retiree, you should discard your credit cards entirely if you want to walk away from debts.

However, if you are unable to pay all the debts before retirement, you should find ways to manage them. Look for less strenuous part-time jobs that will earn you an extra income. Also, you can negotiate for a lower interest rate with the creditors. Such arrangements will help you pay the debt faster and in less time.

3. Starting too Late

Many retirees make the mistake of believing that they have plenty of time to save. They wait until they buy a home and the children have finished college to start saving. Before they know it, they only have 10 or fewer years to contribute towards retirement. If you start saving for retirement in your 20’s, you have at least 40 to contribute to your retirement plan. That means you have more years for your gains to compound.

Richard Russell, the author of “Rich Man Poor Man”, illustrated the power of compounding using the examples of two savers. One saver (A) opens an IRA account at the age of 19 and contributes $2000 consecutively for seven years and stops at the age of 25. The second saver (B) starts at 26 years and saves $2000 continuously till the age of 65. Comparing the results of the two savers, A ends up with more money than B. A had seven more years of compounding than B’s 33 additional years of saving.

4. Failing to Take Advantage of Tax-Preferred Retirement Accounts

retirement planning mistakes

The best way to beat Uncle Sam is to use the tools that he has provided. One of the worst retirement planning mistakes that retirees make is not taking advantage of these tax incentives. For example, individual contributions to 401 (K) and IRAs attract tax breaks. These contributions reduce taxable income and allow your savings to grow tax-deferred. In tax, deferred tax is tax avoided.

As if that is not enough, employers offer a savings matching plan which is free money. The best way to enjoy the “free money” is to contribute the highest amounts and get the highest match possible. For example, if you are in the 30% tax bracket and you save $5,000, you get an extra $1,500. Also, with a 50% employer match, you get $2,500 of free money, totaling to $4,000 in benefits.

5. Assuming Social Security Alone will be Enough

Social security alone cannot sustain you in retirement, contrary to the beliefs of many retirees. Social security will only cover a portion of the retirement savings. You should invest in high return investments to earn an extra income. The additional income will help you pay health care expenses and sustain your lifestyle.

The average social security benefits averages around $16, 000 annually. The maximum benefit for those retiring at full age stands at around $32, 000 annually. One of the retirement planning mistakes that people make is refusing to invest because they have social security benefits. As a rule, you should invest in high-interest portfolios to supplement your social security benefits.

6. Underestimating Healthcare Expenses

retirement planning mistakes

Health care cost is one of the biggest retirement expenses. Retirees make the assumption that the government will cover all these costs. However, the government can only pay a fraction of the cost and the rest will be catered for from your savings. A 65-year old couple incurs an average of $245, 000 in out-of-pocket health care alone. The costs may be higher or lower than that depending on your circumstances.

The days of relying on the employer to provide a guaranteed income for life is slowly coming to an end. Instead, you should devise a plan to help you cater for healthcare costs on your own. For example, you can use a Health Savings Account (HSA) to save money for healthcare. Contributing to the HSA will also help lower the tax payable, just like a 401 (K). The money will accumulate over the years, and you can withdraw it in future to meet necessary expenses.

7. Investing too Aggressively or Being Too Conservative

Making bad investment decisions will damage your retirement. Such decisions can either wipe off your retirement savings or lead to negative investments. For example, ignoring proper asset allocation by investing in your employer’s company stocks is bad for your savings. If something went wrong, you would lose both your salary and retirement savings.

Conversely, being too conservative and investing in safer investments can hurt your savings. Retirees prefer investing in money market funds, CDs, and guaranteed annuities. After considering taxes and inflation, these investments may result in negative returns over time. People make the mistake of trying to compensate for their little savings by taking more risks. To reap maximum benefits, you should balance your risks with rewards.

Final Word

These are some of the retirement planning mistakes that can ruin your retirement. People heading to retirement ought to make wise investments decisions to sustain their lifestyle. Relying on the social security benefits alone will affect your ability to meet future expenses. Also, saving towards a Health Savings Account will help you meet healthcare costs. If in doubt, you should consult a financial advisor to help you avoid these retirement planning mistakes.

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