Consider some of these common mistakes that people often make when planning for retirement.
Avoiding these pitfalls can increase the likelihood of reaching your goals.
1. Not having a retirement plan.
Only 11% of people have prepared a formal, written plan for retirement.1 Without a formal plan for retirement, it’s very difficult to reach goals, especially when you haven’t even defined those goals.
2. Failing to start saving early.
When you start early, the power of compounding interest makes a bigger difference than setting aside a larger amount later on. With compounding, you add interest to principal and the whole amount earns interest, in turn growing at a much faster rate.
3. Not participating in employer-sponsored plans.
Participating in your employer’s retirement savings plan like a 401(k), 403(b), etc. is a no-brainer, as most plans have matching contributions. Not participating is like turning down a raise since you’re essentially leaving “free money” on the table.
4. Cashing out your retirement account when changing jobs.
Taking money from your retirement account and using it for something else, not only seriously harms your future retirement income but essentially gives a large chunk to Uncle Sam in taxes and penalties.
5. Trying to time the market.
Consider your portfolio to be like a bar of soap, the more you handle it, the smaller it gets. Stay focused on the long-term perspective, rather than chasing short-term gains.
6. Underestimating how long you will be retired.
Depending on when you retire, you could spend almost as much time in retirement as you did working. Many people don’t save enough to cover expenses for 25 to 30 years.
7. Saving for college instead of retirement.
You may be more focused on education costs since they come first and will help your children’s future. But if you have strong retirement finances, you will be in a much better position to help with college costs. Remember, there are no scholarships or loans for retirement.
8. Lacking diversification.
It’s important to have a variety of asset types in your retirement portfolio. In addition to having a variety of asset options, true diversification also means accounting for factors like taxes, flexibility, access, etc.
9. Not calculating how much you need for retirement.
Only 41% of people have calculated how much money they will need.1 The rest simply guess and end up exhausting their retirement savings early, resulting in having to make significant changes to their standard of living.
10. Not planning for medical expenses.
Medicare only covers basic medical expenses so you will need to pay for the rest yourself. These out-of-pocket expenses could be a significant part of your savings.
11. Ignoring the impact of inflation.
It’s critical to plan for the increasing cost of goods and services. Even a modest inflation rate of 3% will have a big impact over the course of your 30-year retirement.
12. Borrowing against an employer-sponsored retirement account.
Taking money out of your savings plan like a 401(k) can mean thousands of dollars lost in compounding interest. It’s estimated that a $25,000 loan early in your career could cost $175,000 in lost retirement interest over the course of 30 years.
13. Losing confidence and patience during market downturns.
A market downturn, like the one in 2008, was “on paper” for many people until they locked losses by selling their equities. Focus on your long-term goals, rather than being driven by panic and fear.
14. Taking on additional debt.
Ideally you want to start retirement debt-free to maintain a comfortable standard of living. Make the big-ticket purchases before retirement and plan to pay them off before you stop working.
15. Trying to do it yourself.
Many people take a do-it yourself approach, but lack the knowledge, discipline, and objectivity to successfully manage their plan. A financial professional can provide expert advice, an objective viewpoint and take away the emotions that often drive financial decisions.
While you may have already started saving with contributions to a 401(k), etc., it’s important to have a formal retirement plan. Together with a financial professional, you can create a solid plan that outlines your future goals and the steps needed to reach those goals.
1 Retirement Confidence Survey conducted by the Employee Benefit Research
Institute (EBRI), 2017
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