When you hear the words “retirement planning”, do you experience feelings of excitement, or dread? For most individuals, it’s probably the latter. That’s unfortunate because retirement planning is a financial goal that most of us have to face, and its importance cannot be overstated. When it comes to planning out the financial state of your golden years, you’ll want to make sure you get it right, because there are no “do-overs” in retirement. The outcome may mean independence and financial freedom if you’ve done your homework, or poverty and financial stress if you haven’t.
Much has been written about the basic principles of Retirement Planning 101, such as: Have a Plan, Be Sure to Save Enough, Be Sure to Save Early Enough, and Don’t Rely on Social Security. Let’s focus here on some other pitfalls that you’ll want to avoid falling into:
- Spending instead of rolling over. A very basic rule of financial planning is to never withdraw money saved in a tax-deferred account until after you retire. Unfortunately, many workers who switch jobs early in their careers cash out their 401(k) plans rather than rolling them over to an IRA, meaning they are paying taxes on the money as well as a 10% penalty for being under age 59½. What may seem like a negligible amount of money will actually compound over many years into a significant savings. Cashing out early eliminates this compounding opportunity. You can see for yourself by trying this free compound interest calculator provided by FinancialMentor.com.
- Taking advice from friends and family on how to invest. You trust your friends and family members for advice on many different topics, such as the best new restaurant in town or where to spend your next vacation. But when it comes to money matters, you’re better off consulting with a certified financial planner and registered investment advisor. Not that your friends don’t have your best interests in mind, but they probably aren’t aware of the many tax laws and retirement investment strategies that need to be taken into consideration when handling your personal financial situation. It’s best to leave that to the experts.
- Believing you’ll want to work forever. When you’re in your 40s and 50s, enjoying good health and vitality, it’s easy to predict that you’ll want to continue working into your 70s. However, circumstances can change and health conditions can emerge, causing you to rethink that plan to keep on working. Working part-time or even launching a second career after retirement are great ways to feel productive and engaged, but this earned income should be considered a bonus to your lifestyle, not a necessity. It’s problematic to plan your retirement security on earned income such as this, because you may realize you don’t want to work as long as you once thought you did.
- Ignoring inflation. Costs continue to rise, so the money you have today will buy much less 10 and 20 years from now. It’s important that you take the rate of inflation into account when forecasting your budget and managing the distribution of your retirement assets, to ensure that you calculate a realistic amount of income to sustain you years from now. Try out this inflation calculator, provided by Prudential, to see how inflation will affect your spending dollars over time.
- Starting Social Security too early. Early retirement benefits are available at age 62 but there is a financial bonus for collecting Social Security later rather than sooner. The earlier you begin collecting benefits, the less you can expect to receive. Waiting until you reach the full benefit age – which depends on the year you were born but let’s say age 66 for the sake of argument – will ensure an additional 8% benefit for each year you delay collecting benefits. If you wait until age 70, your benefit will be 32% higher because of that delay. It may be tempting to begin your Social Security benefits early to guarantee a source of income, but it may be wiser to start spending down your retirement savings first, and thereby delay taking Social Security. Of course, this is dependent upon how much of a nest egg you have accumulated.
- Spending too much early in retirement. You have your freedom now to spend your days as you choose, enjoying your hobbies and not having to cram your vacation into a one week window. But here’s a word of caution – your money has to S-T-R-E-T-C-H and you have no way of knowing for how long. When you’re in the early stages of your retirement, any assets still invested have time to continue to grow. Overspending at this time creates two issues – the loss of the money for one thing and the potential returns that money would have garnered over the next 20 years or so. It’s important to consult with a financial planner long before you retire, to formulate a budget that accounts for your projected pension, retirement accounts, and Social Security. And then stick to it.
When it comes to your retirement planning, prepare yourself to face it head on. Become financially educated so you have the confidence to make sensible decisions. Consult with a professional and make a prudent game plan. There is too much at stake to not take this seriously. All the years you worked and saved depend on the decisions you make as you enter this stage of your life. Having the financial skills to make wise choices puts you on the road to the financial security you deserve.