It is often said that people should take a well deserved vacation after they reach retirement, but what they encounter on this journey to the end is often not a smooth ride. Most individuals fail to realize that their ideal retirement can be destroyed by poor financial choices. It is just like failing to plan; small mistakes made today lead to big problems in the future.
In this article, I will highlight the most common pitfalls that you should avoid in order to protect your retirement. If you are aware of these potential pitfalls, with some planning and self control, you can avoid them and look forward to the retirement you have worked so hard for.
Neglecting to Save Early
The earlier you start saving, the better it is for you. Starting in your 40s or 50s means you are leaving out at least ten years of compound interest to your retirement savings. Begin with a small amount, but begin as soon as possible, and your future self will be grateful.
Fully or Heavily Depending on Social Security
Social Security was never designed to be a retirement plan by default. To be more specific, the Social Security Administration advises retirees to depend on it only for about 40% of their income. But many folk still think that they can survive on their Social Security checks alone. You need to create more savings through 401(k)s, IRAs or any other investment to augment your Social Security and the kind of life you wish to have in your post working years.
Investment Without Diversification
Concentrating on one investment is a bad practice when investing and the same applies when preparing for retirement. Diversification is a rule of thumb in investment because concentrating with a single investment opportunity such as company stock or real estate is dangerous. Investing in a variety of assets including stocks, bonds and mutual funds minimises risk and increases the possibility of a regular return on investment.
Healthcare Costs Are Sometimes Underestimated
Medical expenses during retirement years are one of the biggest expenses a person is most likely to meet. Healthcare costs a lot of money and if not well planned for it can easily distort your entire budget. Instead, one should set some amount in Health Savings Account (HSA) during the working period and research for long term care insurance to deal with some medical expenses in the future.
Ignoring Inflation
Prices increase with time and the money you have in your pocket today may not go as far as you plan when you are in your retirement age. Inflation is a real enemy that can reduce your retirement funds if you do not consider it. To avoid this, ensure that your retirement funds are sunk into a product that yields a return higher than inflation; stocks, inflation-indexed bonds etc.
Taking on Too Much Debt
Credit card debt is a very costly type of debt, and as one gets close to retirement, it becomes very difficult to clear the debt. Retiring with too much debt means that sometimes you’ll need to spend more money for essentials, in essence using up more of your retirement fund or having to take up a job to make more ends meet. The main issue is to get rid of high interest debts as soon as possible and refrain from borrowing as you approach the age of retirement.
Early Disposition Out of Retirement Accounts
Sometimes a person may be confronted with an expense that he would like to pay right now instead of in some years down the line, but touching the retirement savings will be very disadvantageous. Taking money from your 401(k) or IRA before you are 59 years and 6 months of age may attract penalty and or taxes and also diminish your savings for future use. If you must withdraw, make it temporary and take loans rather than permanent withdrawals and do not use your retirement funds if not necessary.
No Budgeting for Retirement
People do not only think of retirement simply as putting down money for the period after working; they also think of how much money they want for their retirement period. Failure to have a clear retirement budget might see a person spend a lot before they retire or equally end up with little savings when they are already out of the working force. A good budget will help you to see where you are and where you are going so you can stay on track.
Forgetting About Taxes
Worshipping tax-free retirement as the perfect haven for seniors is a complete myth. If you take money out of retirement plans such as your 401(k) or traditional IRA, that money is taxed as income. That means you could owe more than you planned when it is time to withdraw cash out of the account. To minimize your tax liability, think about saving for retirement in a tax-sheltered way and using tax-exempt options such as Roth IRAs in which you pay taxes now and don’t owe any in retirement.
Not Having an Emergency Fund
In life, everything happens unplanned, and there are always emergencies that crop up. In case you have no emergency fund, you may be compelled to use your retirement savings to cater for an emergency. Try to have at least $3,000-$6,000 saved in a separate chequing account where you don’t touch retirement money when you have an emergency.
Misconceptions of Excessive Retirement Earnings
Many assume their retirement income will be quite close to the level that was being earned while employed. However, this is not often true. In fact, the retirement age individuals experience a decline in their income levels owing to factors such as early retirement, or no frequent promotions and corresponding salary adjustments. If you expect to live off the money from Social Security, pensions, and personal savings, don’t set high expectations.
Ignoring Estate Planning
Estate planning does not only apply to the high net worth individuals, but to every person who needs to think over what should happen with his or her property after his or her death. Lack of a will or trust can cause many legal problems for your family and slow down the distribution of your property. Be certain that a proper estate planning has been done which include; a will, healthcare directive, and durable power that conveys your wants to be respected and your loved ones saved.
Mistaken Assumption of Longer Working Years
There are probably some individuals who can continue fetching an income until they are in their seventies or eighties but that certainly doesn’t apply to the generality of the citizens. During your working years, you can develop health issues, you might not find a job as quickly as before, or maybe you just don’t want to work anymore. One must not fall into the trap of thinking that one can just work a little longer, to cover up the described deficits.
Disclaimer: This list is solely the author’s opinion based on research and publicly available information.
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