Avoid These Financial Mistakes When Planning For Retirement
After a lifetime of work, most people look forward to retirement, picturing it as a time to relax more and to dedicate more time to hobbies that were getting ignored in the past — whether we’re talking about gardening, traveling, exercising, etc. To transition to retirement is important however, and leaving things to chance will increase the risk of running out of money during the golden years — and the last thing desired is to not have enough money to pursue a passion you have after you worked your whole life. How good the retirements year will be depending a lot on how people prepare for them, and there are certain mistakes that need to be avoided.
The most basic of mistakes that should be avoided when it comes to retirement is not having a plan in place. A 2017 survey showed that just 41% of the people who answered noted that they or their spouse have estimated the amount of money they’ll need during their retirement years. Knowing how much money to aim for will help you figure out how to amass that money — by increasing savings, taking another job, or cutting back on spending.
Plans will differ from person to person, as there is no “one size fits all” number as far as how much money should be saved for retirement. Experts suggest that people should aim for 80% of their income — for example, if a person earns $100K every year, they should aim for $80,000 per year during their retirement. Delaying saving for retirement is also a mistake and will end up being a costly one. Depending on the amount of money people aim for their retirement, savings should be made right away according to plan, or otherwise they will simply miss the mark.
Inflation plays an important role as well. In 1975, inflation was 9%; over 13% back in 1980, 6% in 1982, and fast forward to 2015, when inflation was almost 0%. There is no fixed amount when it comes to inflation, and in any given time period it can be higher or lower. Even a lower figure can end up shrinking the power of your future money considerably. While retirees might aim for a certain amount of money for their retirement years, taking inflation into account is crucial.
If inflation is at 3%, the cost of living will double every 24 years, and other costs — such as healthcare — are currently growing at more than 3%. Equities are being recommended as a way to combat inflation. If the inflation runs at 3.5% ever year, having some money in the stock market can yield returns that are about inflation — for example, a moderate portfolio with 6 to 7% returns will be able to keep up with inflation even after withdrawals take place.
Speaking of withdrawal, there’s also the risk of taking out too much money too soon. A 4% withdrawal is considered to be a safe amount that retirees can pull from their accounts every year without the risk of running out of money. On the other hand, the fact that nowadays there is an outlook for getting lower returns on all types of investments makes plenty of experts question the 4% rule.
The amount can vary nowadays, and it depends on whether the person who is retired expects to have other income sources as well — such as from annuities or pension. Knowing what the safe percentage is ideal for you can be done with a financial planning software, which uses simulation in order to produce more reliable figures when it comes to complex situations. The software will get all assets and income expectations and will show how long the money will last in a given situation.
Knowing the safe percentage is important, as there is the chance that retirees will outlive their money. Longer life expectancy, in part, increased the worries of people outliving their retirement savings — there is a 1 in 4 chance of a person in a couple to live to be 95 years old, and a 1 in 10 chance of people living to be over 95 years of age. In order to decrease the risk of outliving the money, claiming Social Security benefits can be delayed until the maximum benefit is reached at the age of 70.
It’s important to note however that retirees should not assume that the Social Security benefits they’ll receive will be enough to support them. Recently, the average Social Security retirement benefit was approximately $17,000 per year; the maximum benefit when it comes to retiring at the full retirement age was around $33,000 per year. Relying on social security is not ideal. While some people might have earned more and thus be able to collect more, that doesn’t mean that the amount will be a lot bigger. Planners can help people figure out how much they should expect from Social Security, and then they can incorporate that amount into their financial plans.
Being strategic about Social Security and taking the time to learn more about what moves should be made during the retirement years can end up being of great benefit, and while the figure expected might not be large, it can end up being higher, which would make a huge difference. Retirees should not start collecting Social Security benefits right away without learning more about the subject and the strategies necessary in order to maximize it.
Invests rates are something that require attention however, as there is the risk of not getting adequate returns on the safer debt investments. While rates are rising, fixed-income returns are lagging when it comes to historical norms. High-dividend stocks are recommended to be used as alternatives to bond yields. Investments can be relatively safe, paying between 5 and 7%.
The risk of dumping stocks in a downdraft that is temporary is something to pay attention to as well. Individual investors can tend to sell low when it comes to bear markets, which is why relying on a more professional money manager is more recommended. People tend to get emotional when it’s about their own money, and selling during a bear market is not a good idea. Having someone to handle the money for you can end up being a wise decision.
The medical bills can play a big role in draining the retirement account, which is why in order to avoid this happening it’s recommended that retiring should be delayed until the age of 65, which is when the eligibility for Medicare kicks in. On the other hand, even with Medicare, there might be health-related expenses that will need plenty of out-of-pocket money, which is why getting long-term care insurance when premiums are lower is recommended.
A 2018 survey showed that only 19% of workers took the necessary time to estimate how much money they are going to need in order to cover healthcare expenses during their retirement years. While there is no way to know the exact figure, having a rough idea helps. On average, a 65-year-old couple will spend a total of $275,000 on healthcare, money which comes out of their pocket — and this figure does not include long-term care expenses). Being smart about choosing a Medicare plan that is the most suitable is recommended. People can also stay healthier in order to reduce future issues by simply getting preventive care and screening regularly.
One mistake that can be easily avoided is not taking into consideration cognitive decline. If age-related cognitive impairment kicks in, managing a portfolio can be challenging. This can be solved by having a healthcare power attorney prepared in advance. Having someone take over the account and make the decision on behalf of the retiree can end up saving their financial status.
Timing should not be ignored either, as there is the risk that people might retire during a bear market. While a 4% annual withdrawal might be a common figure, when it comes to a bear market, that figure will make the portfolio fall in quick fashion, to the point where 4% will no longer be a sustainable rate. However, people will retire every year, regardless of the status of the market, which is why in order to avoid the problems that might arise from retiring during a bear market, having a cash emergency fund can be a good way to go around the issues and not tap into retirement accounts. The market does come back at some point, but until that point relying on the cash emergency fund is ideal.
Conclusion: There are certain steps that people should take when it comes to generating income for their retirement, the main ones being having a plan in place — which takes inflation into account — and identifying potential risks and mitigating them. Inflation, as well as interest rates and bear markets can pose a great threat to the retirement income, which is something that should be taken into consideration and planned for ahead in order to know how to face the issue. Healthcare is also an area that require attention, as it will end up impacting the financial status, which is why learning more about Medicare and long-term care insurance is recommended.
