In the best of worlds, individuals start saving for retirement with the first paycheck they receive. While some of us were savvy enough to start saving for retirement starting with our first job out of college, the reality is that even with a modest income; high rent, paying back student loans, and having a full paycheck for the first time; many put off saving for retirement until a much later date. In fact, less than 1% of workers actually start and stay committed to contributing to a retirement account their entire work life. The most common time for folks to start their pre-retirement planning is in their late 40s and 50s, when retirement is now a real possibility in the not-so-distance future.
Yet, even with a good income, there are some big mistakes people can make when it comes to retirement planning. The unfortunate thing is that the effects of decisions made now, or shortly into retirement, often won’t be realized until it’s too late to make financial repairs. Here’s how mistakes can happen without proper planning in advance:
- Moving without researching cost of living – Americans like to move. As a country, we are more prone to change geographically every generation than most other countries. But that wanderlust has a price, and if we move to a location that doesn't align with our standard of living in retirement, we can pay dearly in our retirement years. This is the issue where what barely suffices as making it in California could buy a person a mansion and 20 acres in Wyoming. If you're thinking about moving, even in your younger years, take the time to compare the cost of living in two cities1 and read up on how to pick the best place to retire.2 The choice to plan now can pay dividends in your retirement years.
- Not doing the math – How much do you need vs. how much do you have saved? Too many people retire without taking the time to crunch the numbers to determine if they have enough saved to retire comfortably. Studies have shown3 that withdrawing 4% of your portfolio value in retirement is considered to be a safe withdrawal rate. However, for folks considering retirement while interest rates are still at historic lows like they are today, the safe withdrawal rate may be even less.4 If you run your numbers, do you have enough? If you find yourself coming up short, what are some things you can do to better your chances of achieving the safe withdrawal rate? Can you spend less and save more? Perhaps plan on spending less in retirement, or planning to retire a year or two later may make a bigger difference than you might expect.
- Putting off critical insurance – One of the larger risks to retirees, even if they are on track to maintain a safe withdrawal rate, is healthcare and assisted living needs in retirement. The cost can be a large drag on portfolio values, so the options are to either plan for the additional expense in retirement, or consider insurance. If you need insurance, the longer you wait, the more expensive it will be if you wait until retirement to obtain it. That’s because you’re a higher risk to the insurance company later on.5 If you can afford it, consider obtaining long-term care and good health insurance coverage now to avoid paying higher premium rates if you wait until retirement to actually obtain the insurance coverage you need.
- Lack of vision for what you want to do in retirement – A lot of money is wasted in retirement because people don’t have a plan for what they will actually do with their time. Spend some time now and develop a plan for what you want your retirement to be like. Having a goal will give you purpose and confine your spending to what matters for you. Still not sure? Consider asking yourself 3 Simple Questions6 that may ultimately give your life more direction and purpose today, and in retirement.
- Don’t miss Medicare sign up deadlines – A key reason people lose money in retirement is due to not following the deadline when it comes to signing up for Medicare. Medicare is age-certain, and you have a 7 month window7 to sign up for it around the time you turn age 65. The window opens 3 months before your turn 65, included the month in which you turn 65, and ends 3 months after the month you turn 65. Waiting longer triggers a late enrollment penalty8 that you will pay every month for the rest of your life. Plan to continue working past age 65? Be sure you read up on the rule related to special enrollment9 to learn more about the rules related to enrolling at a later date.
- Don’t leave Social Security on the table – You worked for it, you earned it, so why do so many people forget about their Social Security benefits? You've paid at least 6.2% of your income along the way (in most years) so make sure you're taking advantage! This is a meaningful portion of your retirement resources and anyone who worked the required number of years is eligible for recovering payments from their years of paychecks. But the timing matters too: wait long enough and you maximize the benefit; start too early and you take a reduced benefit for life. If you're married, be sure to account for spousal benefits and survivor benefits down the road as well. The Social Security website10 has a lot of useful resources, but working with a comprehensive financial planner can help you make sense of how this piece fits into the overall retirement puzzle for you. The decision of when to start Social Security will make a big difference in your daily income when you’re in your later retirement years and reliant on a fixed income.
A successful retirement plan takes time and effort to put together. Do your research, take advantage of all your options and resources. If you need to modify your plan, take action now to improve your chances of living out a relaxing, stress-free retirement.
Investment Advisory Services offered through EnRich Financial Partners LLC, a Registered Investment Advisor.
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