Retirement planning can sneak up on you. You are busy with your job, family, house, kids, and before you know it, your retirement plans of playing golf at Pebble Beach have mutated into donning a vest and greeting people at big-box stores. Unless greeting appeals to you, you should review the common retirement investing mistakes below – and if you see yourself, take corrective action.
- Overly Optimistic Plan or No Plan – Too many people either don't know or don't care to know how much money they will need at retirement until it's too late. Assess your needs realistically. Think about your preferred retirement plans and sketch out your expected costs for that lifestyle – and then double them. You're probably in the ballpark of your needs, because nobody ever plans for the unexpected.
For example, it's estimated that the average 65-year old couple will spend between $200,000- $250,000 on medical costs in retirement, and that's with a standard Medicare plan, and no consideration for nursing home or long-term care. That number probably will not get any better.
There are many retirement calculators online to help you determine how much money you will need for retirement, and the savings rate you'll need to get there. Take advantage of them, and formulate a realistic plan. Seek professional financial help if you are having trouble getting an objective view.
- Not Fully Using Tax-free Retirement Programs – If your employer offers a 401(k) benefit plan, you should contribute as much as you can possibly afford and take advantage of all matching benefits. That's as close to free money as you will ever get. As you rid yourself of debts like mortgages, college educations, etc. and approach retirement age, take advantage of the catch-up provisions that allow you to add beyond the current limits.
- Not Starting Early Enough – If you don't have an employer who offers a benefit plan, open your own IRA as soon as you can. Even small amounts socked away in the beginning will have significant benefits. Early in your working career, it's easy to get caught up in other financial commitments – your family, a house, your children's education… but don't get so focused on these other important parts of your life that you fail to take care of yourself.
- Not Taking a Long-Term View – It's important to remember to keep a diverse portfolio that balances your needs, as you grow older – a higher ratio of stocks and riskier investments in your youth, slowly shifting to more conservative investments as you near retirement. Chasing hot stocks, trying to time the market, panicking after losses and dropping out of the market entirely, no diversification… these all work against your retirement goals. Slow and steady wins this race.
- Cashing Out Funds – Activities like cashing out retirement programs and failing to set up an income stream through distributions, borrowing against 401(k)'s, and drawing Social Security early are the sorts of things that should be done only as a last economic resort.
Think of your retirement funds not as a pool of cash, but as a steady stream of income that will supplement Social Security and allow you to live your preferred retirement lifestyle. Putting it in this context may help you to avoid the temptation to cash out and overspend in the early days of retirement.
If you avoid these pitfalls, you have a pretty good chance of enjoying a happy and satisfying retirement. Otherwise, you still have several years to work on your smiling/waving techniques and to find a good pair of orthopedic shoes that match your vest.