Retirement planning may be the most important financial task you can undertake. The stakes are sky high because it's up to you to make sure your retirement is secure - or that retiring is even an option.
And there are no do-overs. If you mess it up, the only things you'll be able to look forward to in your golden years are money worries and penny pinching, not financial freedom and a comfortable lifestyle. (Do you know when you're going to retire? It might not be as soon as you think. Read The New Retirement Age.)
There are certain mistakes people commonly make with their money, and any of them can spell disaster for a retirement plan. You can avoid them, though, if you know what they are. Here are five such mistakes you may already be making - and how to deal with them.
TUTORIAL: Retirement Planning: Introduction
1. Investing Too Aggressively or Not Aggressively Enough
If you're near retirement, you might not want to have your savings primarily in stocks. What if the market crashed? That could dash your retirement hopes in short order. Conversely, younger people in their 20s, 30s and 40s probably shouldn't pack their retirement savings into CDs or bonds. Those investments have never provided the long-term growth necessary to build an adequate nest egg. Most financial advisors recommend dividing your savings appropriately between safer and more aggressive investments based on a variety of factors like your age, goals, risk tolerance and time horizon. (For more, see Top 10 Tips For A Financially Safe Retirement.)
2. Not Doing a Retirement Budget
Amazingly, half of all older individuals haven't determined how much money they'll need to retire or budgeted for retirement expenses. That places them at high risk for outliving their money and then having to ask their adult children, other relatives or friends for financial help. To avoid this, do a retirement budget well in advance of retiring. Then "test drive" it for a few months to see how things go. If things work out, great; if not, consider whether you can eliminate some expenses and live on less. If necessary, put off retiring for a while and work on building up your savings. (Learn some sensible strategies for making your hard-earned savings last for as long as you need them. For more, see Managing Income During Retirement.)
3. Not Accounting for Inflation
OK, so you've done a budget and it looks rock solid. And it just might be - for now. But don't forget to factor inflation into the mix, using a realistic number like 4%. At that rate, annual expenses of, say, $70,000 in today's dollars would balloon to nearly $104,000 in only 10 years. And most people plan to be retired a lot longer than that. So even though inflation might not seem like a big deal right now, it can really throw a wrench into your retirement budget as prices rise over time. (For more, see Combating Retirement's Silent Killer.)
4. Underestimating Your Life Expectancy
Some people base their retirement spending plans on the average life expectancy for their gender - 75 for men and 80 for women, according to the latest available figures. That's dangerous, though, because there's a 50% chance of living longer than average, so you could end up running out of money too soon. To prevent that, add five to 10 years to your average life expectancy when planning for retirement. Better yet, assume you're going to live to be 100.
5. Counting Too Much on Social Security
Thanks to inflation, Social Security isn't as valuable as it once was and its value is only going to diminish further, especially if the government cuts benefits to help balance the federal budget. Because Social Security's future is increasingly uncertain, people who'll be retiring many years from now should consider excluding it partially or completely from their retirement plans and try to save enough on their own. People at or near retirement should maximize any other income sources they have and hold out for the largest possible Social Security check by claiming benefits as late as possible. Currently, nearly half of Americans take Social Security at the earliest possible age of 62, when benefits are smallest.
(For more, see Top 6 Myths About Social Security Benefits.)
TUTORIAL: Traditional IRAs: Introduction
The Bottom Line
Make saving for retirement your top personal finance priority, even putting it ahead of saving for your children's college education. That may seem selfish, but it's actually very smart. College can usually be paid for with student loans or others types of financial aid, but you're completely out of luck if you reach your golden years without enough savings. Take care of yourself first so you'll be in a better position to help your kids with loan payments later. (For more, see Retiring On Investment Interest: Can It Be Done?)
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