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 people 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 people rarely ever plan for the unexpected.
For example, in 2015, Fidelity estimated that the average 65-year old couple will spend $245,000 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 Retirement Programs – If your employer offers a 401(k) benefit plan, you should contribute as much as you can possibly afford in order to 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 after age 50 that allow you to add beyond the current contribution limits. You should also consider funding a Roth 401(k), if available, as tax-free sources of retirement income may become increasingly important.
- Not Starting Early Enough – If you don't have an employer who offers a benefit plan, open your own IRA or Roth IRA as soon as you can. Even small amounts socked away earlier in life can 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 – you may want to consider a higher ratio of stocks and riskier investments in your youth, but then 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, concentrating your investments with no diversification… these can all work against your retirement goals.
- Cashing Out Funds – Activities like cashing out retirement programs and not rolling them over, failing to set up an income stream through distributions 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 may stay on track and enjoy a happy and satisfying retirement. Otherwise, you may still have several years to work on your smiling/waving techniques and to find a good pair of orthopedic shoes that match your vest.
Brad is a Registered Representative with, and Securities and Advisory Services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. CA Insurance License #: 0B22199.
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