There is a lot to get excited about when stepping into the golden years of our lives. We will finally have enough time to devote to the people and hobbies we love and more freedom to live our life on our own terms. But that is if we manage to set up a retirement plan that will allow us to navigate through the ever-increasing economic security risks. There are a lot of strategies for a stable and robust retirement that suit various circumstances and lifestyles, but the first stepping stone is to know what mistakes to avoid. Mistakes at any stage in life are invaluable lessons in disguise. However, retirement planning and investing mistakes have the potential to be too costly to fix because we may not realize it until it is too late. And since we are more than ever on our own to fund our retirement, that knowledge will save us a lot of financial stress down the road.
#1 Don’t Overestimate the Time You Have for Planning
Retirement planning is a long-term undertaking, and you will be better off if you start sooner than later. Ideally, the time to begin setting goals, planning, and making regular contributions towards retirement is when one enters the workforce and starts making money. But for many, that is an unrealistic expectation.
Still, we should not overestimate our wage-earning years. Life can be full of surprises, and due to reasons like forced retirement or health problems associated with old age, working till whenever may not be the safest plan.
#2 Don’t Underestimate Your Life Expectancy
An understandable fear for anyone planning their retirement is outliving their funds. But we can’t determine the end date of our retirement like we can for its start date. There are numerous life expectancy tools and methods out there that can help us in our calculations, but ultimately, nobody knows the limit to the time they have left in their life. The financial risks of living longer are always higher in these estimations.
According to the CDC, men and women born in 1960 in America are expected to live until 85 and 87 years old, respectively. And as far as retirement plans go, you should factor in that number for the worst-case scenario, i.e., your shortest estimated longevity. Life expectancy has jumped by more than six years globally over the last two decades, and we are witnessing a growing trend in the number of centenarians as we move forward. This is terrific news, of course, but needless to say, we have got to plan for it.
#3 Don’t Ignore Inflation
Fewer things are costlier than underestimating, or even worse, ignoring the inflation when planning for retirement. For a very long time, the US had had a relatively low annual inflation rate of around 3 percent, but the last few months have shown us that we can’t count on it, not for a long retirement anyway.
Inflation must be viewed as an inevitable cost that insidiously eats away at our purchasing power every year. And different categories of consumer goods and services such as food, transportation, education, housing, and healthcare are going to be affected by it differently. For example, education and healthcare cost increases have been much greater than in other sectors. Our expenses will not be the same in ten or twenty years, nor should our cash flow and income plan. Smart retirement plans protect wealth by incorporating ways to hedge against inflation. To know how best it is done, read more here.
#4 Don’t Leave Out Tax Projections
Here is a reasonable assumption many make: since we are not going to work post-retirement, we are not going to earn an income, and thus, we will not have to pay taxes. As much as we like that assumption to be accurate, that is not how things are going to play out, and we all typically have to pay some sort of taxes in retirement.
Knowing this will keep you from getting nasty surprises. Moreover, it allows you to take some proactive measures to minimize the amount you have to pay in taxes so that you will have more left over to spend on important things.
#5 Don’t Allocate Your Assets Improperly
There are lots of investment solutions that have been designed for those who are growing their money for retirement, and virtually all of them incorporate a diversification method to reduce risk. Tying up a big portion of your net worth to a single asset class can be detrimental to the wealth you have accumulated through sweat and blood, and there have been more than enough declines and sharp market swings in recent history to prove that theory. Diversifying your investment portfolio across different geographical locations, sectors, industries, companies, and asset classes is a tried and true strategy for mitigating risk. Don’t put all your eggs in one basket.