Did The Devil Make You Do It? 8 Retirement Miscues
We're all human, and we all make mistakes. Yet some errors are worse than others, and it's important to try to avoid the kinds of miscues that could derail your retirement.
What sort of mistakes? Of course, these will vary from person to person, but here are eight common foul-ups that often bedevil soon-to-be retirees:
Mistake #1 - You have no financial plan for retirement. Although your plan doesn't have to be carved in stone - and in fact it needs to be flexible - it at least should provide some basic guidelines for your future. A bare-bones plan will look at your potential sources of retirement income and approximate what you can expect to spend - and rough estimates are better than no estimates at all. Figuring out what it may take to live comfortably during retirement is the first step toward getting there.
Mistake #2 - You have too much debt.
Perhaps nothing can be more damaging to successful retirement than crushing debt. Avoiding high-interest-rate credit card charges can help you head off the problem. If you spend within your means and borrow judiciously, you'll be able to save more for retirement and won't be burdened by the need to pay off compounding debt.
Mistake #3 - You sacrifice retirement planning for education planning. Saving money for your children's college education is obviously a lofty and worthwhile goal, and starting early can help ease your financial burden when tuition bills come due. But you may not want to make education saving your primary financial priority. Often, parents are able to help pay college bills while still putting away money for retirement, and your kids can help by taking low-interest loans to cover part of their costs.
Mistake #4 - You don't keep an emergency fund. Even if you've been diligent about saving for retirement, remember to expect the unexpected. You might lose your job or face another financial or medical emergency, and having a cash cushion to fall back on can help you avoid dipping into retirement funds - an option that could have short- and long-term tax and financial consequences. The usual rule of thumb is to try to set aside at least six months worth of salary in a rainy day fund.
Mistake #5 - You don't have a long-term investment strategy. You're likely to fare better if you establish a long-range investment plan for retirement rather than trying to boost your portfolio by chasing hot stocks. Time-tested principles such as asset allocation and diversification can help you make steady progress toward your goals, whereas playing investment hunches is likely to produce more losers than winners. And taking a smart, deliberate approach is as important for investing the assets in tax-sheltered retirement plans, such as 401(k)s and IRAs, as it is for taxable accounts.
Mistake #6 - You underestimate health care costs.
As people live longer and longer - and as growth in health care costs continues to outpace overall inflation - you'll need to allocate a healthy portion of your savings to personal care. Often, health insurance plans and Medicare will cover much less than you've counted on and you'll need to use your savings to make up the difference. What's more, an extended stay in a nursing home could destroy your retirement nest egg. Consider buying long-term-care insurance to help ward off future disasters.
Mistake #7 - You don't factor in taxes. People often disregard the impact that federal and state taxes can have on their retirement savings. For instance, if you've been accumulating funds in a 401(k) plan and traditional IRAs, when you withdraw money from those accounts to pay your retirement expenses those distributions normally will be taxed at ordinary income rates. In addition, whether you want to or not, you'll have to start taking money from those accounts after you turn age 70½. Your long-term plan for retirement needs to take these taxes into account.
Mistake #8 - You count too heavily on Social Security benefits. After you've paid into the Social Security system during your working career, it's only fair that you reap the benefits. But those monthly payments usually aren't enough to live on comfortably, not by a long shot. It's important to view Social Security as only a supplement to other sources of retirement income - from your investments, company retirement plans, and IRAs.
Making any of these mistakes could cause trouble when it's time to retire. But if you know what to look out for you may be able to avoid problems - and the best time to start fixing things is now.
This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.
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