Retirement 101: 10 Mistakes You Need to Avoid
Though retirement is something that should excite people, survey shows that only 13% are strongly confident about their retirement savings. The reason why only a handful is positive about facing their golden years is because only few people have actually planned effectively.
The good news is, you have the power to change this statistic and steer your retirement in the right direction. If you're in the process of preparing for your golden years, here are 10 mistakes that you need to dodge in order to live the kind of live you've always envisioned.
1. Having No Plan at AllWorking towards a goal without any kind of plan will only lead to a disastrous outcome. Therefore, not having clear-cut objectives for retirement will cause you to end up with insufficient savings, not living the life you've always dreamed of or becoming a burden to your loved ones. Of course, you wouldn't want all those years of hard work to just result to that.
Retirement is a major phase in your life that you need to gear up for. As you get ready for it, make sure that you have a course of action to follow. This will give you a sense of direction and will keep you constantly on track.
Determine how you intend to spend your time during retirement. Are you going to travel or are you planning to devote your time on new things? By identifying the activities you want to do during this time, you'll be able to gauge how much you need to save in order to maintain that lifestyle. Once you calculated a figure, look at your retirement nest and determine how much more you need to periodically put aside in order to meet your target amount.
2. Waiting Too Long to SaveIf you're still young and not anywhere near retirement, it seems easy to put off saving for the future. You may resolve to start saving for it once you have a higher salary, a promotion or decreased financial obligations. However, savings for retirement is something that you would want to do ahead of time. If you keep on re-scheduling, you could end up realizing that you're already near retirement, yet your nest egg is still far from how much it's supposed to be.
If you start saving early, you have the advantage of taking small and gradual steps. You can set up a separate account and program it to receive automatic contributions from your paycheck. You can start with as little as 1%. It may seem small, but it's better than having no savings at all. More so, it's a good start as you build your retirement fund. However, keep in mind that your contribution should increase as time passes.
3. Using Your Age as a Basis of When You Will RetireOn average, men retire at 62 to 64 years old. Meanwhile, the usual retirement age for women is between 60 and 62 years old. Though this is the norm, using this as a basis of when you'll leave the workforce is not advisable.
You need to understand that the right time to retire is not dependent on your age; rather, it's about having sufficient funds socked away for the years ahead. Again, you will only determine if you already have enough if you're clear about what you want to do during this period. It's all about having a plan.
You may argue that you've already contributed to retirement plans such as your 401(k), thus you can retire once you reach the average retirement age; however, the question here is if your savings will be able to suffice all your expensesÃƒÂ¢??both expected and unexpectedÃƒÂ¢??once you leave your day job.
If you find that you have not put aside enough, you can delay your retirement or explore the options of working part-time in retirement.
4. Missing Out on 401(k) PlansIf you're an employee, you can be easily entitled to enroll in a 401(k) plan. If you haven't started on it, you should consult your human resources department and learn how you can get started on this retirement savings account as soon as possible.
Contributing in a 401(k) plan is a good saving vehicle to grow your retirement nest egg because it's designed to help you in doing exactly that. Moreover, most companies have a match program wherein your employers will add a percentage of your contribution on top your retirement savings. It's like being handed free money or being given a salary increase. If you choose to pass on this retirement plan, it's like you're saying no to additional dollars for your retirement nest-egg.
Traditionally, 401(k) plans are tax-deferred; meaning, you will only be imposed to pay taxes once you withdraw from this account. More so, contributions are taken out before taxes, thus, your taxable income is lower. Meanwhile, Roth 401(k) plans are also being offered. In this retirement plan, what you contribute will already be taxed, but it will grow tax-free along with the interest that it will accrue in the long run. To determine which one is right for you, you can seek the advice of a financial advisor.
5. Having No Strategy for Retirement IncomeThe main purpose of retirement savings is to make sure that you have enough financial means to support your golden years. Initially, it's about wealth building; but as you near retirement, your strategy should transition into transforming this wealth into a steady stream of income once you already leave the workforce. All your savings and investments for the golden years will all be for nothing if you don't know how to turn it into a regular financial source for retirement.
Once you leave your job, you are, in effect, leaving your monthly payroll. At this point, your years' worth of retirement savings as well as your portfolio will be responsible for replacing your regular income. That's why it's important to have a good strategy in distributing your retirement fund.
If you're a year or two away from retirement, you should begin transitioning your money from pre-retirement accounts to post-retirement accounts. From there, you can create a distribution plan. This part is very crucial and some people actually begin the transition even if retirement is still several years down the road.
Apart from your distribution strategy, there are several factors that can affect how much retirement income you can expect from your retirement nest egg. These are the returns on your investments, your life span and inflation. As much as you can, make sure to factor in all of these.
6. Prioritizing Your Family over Retirement SavingsParents always have their children's best interests at heart. As much as they could, they would look after their son's or daughter's welfare. This explains why 68% of people aged 50 and above are still providing financial support to their adult children.
Today, most middle-aged parents are sandwiched between supporting their children financially and trying to save for retirement. Unfortunately, most delay on the latter because they see their child's college education and rent as more pressing needs. Though this reflects the willingness of baby boomers to help their family, it can be alarming as this can have a major setback in their retirement savings.
Ask yourself why you are saving for retirement. Most would say that they want to be self-sufficient because they don't want to be a burden to their children when they grow old. If you agree with this, then you better start working on a financial strategy for the years ahead and draw the line in providing monetary support to your family. If providing support to your family left you with a reduced retirement fund, you'll be left with no choice but to turn to your children for helpÃƒÂ¢??which is the exact opposite of your goal in the first place.
7. Failing to Plan for ContingenciesWhen you enter retirement, you need to be prepared for roadblocks along the way such as health problems and long term care.
Current calculation shows that a 65-year-old couple retiring in 2013 will need $220,000 for healthcare needs all throughout their golden years. This figure is for health-related expenses alone and doesn't include possible expenditures for long term care servicesÃƒÂ¢??which most retirees will likely incur as well. In fact, current estimates show that 70% of people aged 65 and above will need long term care.
As you prepare for your retirement, make sure to take your health into consideration. You can't simply hope that you'll never get frail because eventually, all of us will. That's a fact of growing old that we need to deal with and prepare for.
Review your financial strategy for retirement and see if you have your health and other contingencies factored in. Do you know how you will pay for these expenses along the way? If not, you need to explore your options in doing so. You can rely on government programs or put up an emergency fund but these may not be enough to shoulder these unforeseen needs. That's why it's important to look into insurance productsÃƒÂ¢??such as long term care insurance, health insurance and even life insuranceÃƒÂ¢??that will offer protection for costly and untimely events.
8. Risking Too Little or Too MuchApart from saving money, you also need to invest in order to grow and diversify your retirement nest egg. Most people are put off by the concept of investing because there's risk involved in it. However, you need to understand that it can boost your retirement savings a few notches higher.
A good thing about investing is that you can manage the risks accordingly. For instance, if you want to know how much of your income should be invested in stocks, you can subtract your age from 100. If you're 45 years old, subtract that from 100 and you'll get 55. That means that about half of your income should be invested. However, this is just a rule of thumb and if the amount of your investment worries you, then maybe that's too much. In that case, you can re-consider.
You need to keep in mind that everything that's too much is bad. Yes, this too applies in investing. This financial strategy is risky and the trick to making it work for you is if you know how to manage your risk proportionately. Do everything in moderation and don't forget to diversify your portfolio.
9. Retiring with Too Much DebtNever retire when you still have unsettled and substantial debts. By carrying over this financial responsibility over to retirement, you are clogging the flow of your income. As a result, you may experience difficulties that will inhibit you from completely enjoying this new chapter in your life.
Retiring with a mortgage is okay; but if your mortgage is too expensive and if you have an outstanding home equity loan, you're setting yourself up for a financial catastrophe. Settling an outstanding debt in retirement is possible as long as they don't take a huge chunk off your money for retirement. However, entering this chapter debt-free is still the best way to go.
If you owe a considerable amount of money on multiple debts such as credit cards, mortgages or car loans, you have the option to delay your retirement for a few more years and settle these payables first.
78% of 50-year-old workers report that they are delaying their retirement for financial reasons. If you identify with this statistic, use the extra time to aggressively settle all your debts and contribute on your retirement savings plan. If you want to live a hassle-free retirement, we strongly suggest that you go through it without any form of debt.
10. Not Seeking Professional HelpMaintaining your financial wellness before and during retirement can be quite tricky. First, you need to grow your wealth. Second, you need to distribute it accordingly to generate income all throughout retirement. Lastly, you need to strategize on how you can utilize and expand your savings at the same time.
Strategizing for retirement can be quite confusing and making the right decisions is very crucial because even a single mistake can result to a financial catastrophe. That's the reason why you would want to seek the professional help of a financial adviser.
Working with a financial adviser is very beneficial because they can help you map out your goals and create strategies on how you can attain them. More so, they can also help you determine which insurance policies you should have. However, keep in mind that you need to work with the right credentials to help your plan for retirement. More so, it will also pay to trust your instinct and go for someone you can trust.
Creating an effective strategy for retirement requires effort, discipline and critical thinking. The process is extensive and far from easy, but knowing the common mistakes you need to avoid can save you from a lot of trouble.
By Aris Moreno