No matter where you are in your career, retirement is likely to be on your mind. Since this generation of workers can no longer expect employers to provide a generous pension and health insurance coverage, it can feel like all retirement decisions are up to us as individuals.
Add in the fact that there are a number of ways that retirement planning can go off the rails – and not all of those ways are within an investor’s control – and it’s clear that we have good reasons to be worried about retirement.
Fortunately, several of the most common retirement mistakes and pitfalls are avoidable. Here are three ways many people have undermined their own retirement, and what you can learn from their mistakes:
1. Relying on Factors That You Can’t Control
Finance guru Dave Ramsey has come under fire before because of his retirement investment advice. Ramsey, who offers very sound counsel on how to become debt-free, also suggests that the average investor can count on 12% returns on their investment.
Unfortunately, even if 12% returns were historically accurate (generally, the market averages about a 10% return over time), that kind of advice is a good way to find yourself retired with not enough money. As any financial adviser worth their salt will tell you, past returns are no guarantee of future results. Counting on the market’s ability to grow your money by a certain percentage means you’re relying on something over which you have absolutely no control.
What to Do Instead
Remember that you have complete control over two things: how much you save for retirement and how much you spend (both during retirement and beforehand). So base your retirement plan on realistic numbers, including how much you can save and how much you can adapt to market downturns.
If your retirement plan will only work if you earn a certain percentage through your investments, it’s time to go back to the drawing board and figure out how you can either save more or spend less.
2. Taking Social Security Too Soon
2. Taking Social Security Too SoonSocial Security benefits start at age 62, and for anyone longing for the start of retirement, it can be a huge temptation to start taking benefits as soon as they’re available. But just because you can sign up for Social Security at age 62 doesn’t mean you should.
Delaying your benefits until you reach full retirement age means you’ll receive the full benefits available to you. Taking early benefits will cost you about 25% – the difference between $1,600 per month and $2,000 per month. Add in the fact that your annual cost-of-living adjustment is based upon your initial benefit, and it’s clear that taking Social Security too soon can seriously hurt your retirement finances.
What to Do Instead
The easy answer is to wait until you’ve reached your full retirement age (or even later) before you start taking benefits. The Social Security Administration offers a retirement estimator to help you figure out the best time to take your benefits.
However, even if you did elect to take early benefits, there’s still recourse. You have the option of paying back up to one year’s worth of Social Security benefits and then delaying your benefits until you reach your full retirement age. So if you started taking benefits last year when you reached age 62 and have since changed your mind, you do have the option of paying Uncle Sam back the money you received and wiping your slate clean – with no penalties.
3. Underestimating Your Health-Care Expenses
Health-care costs are not the sort of thing that most of us like to think about (or budget for), particularly when planning for retirement. It’s much more fun to daydream about days spent on the golf course or traveling the country. And isn’t that what Medicare is for, after all?
Not exactly. Many people may not realize that Medicare requires both premiums and co-pays and it doesn’t cover every medical or health-related service you might need. That means you’ll need to plan on using some of your nest egg to pay for healthcare, which, depending on what you need, could seriously derail your retirement.
What to Do Instead
While the bite of healthcare costs won’t go down if you ignore them, there are a couple of things you can do to mitigate them.
First, look into putting money aside in a Health Savings Account (HSA). If your employer offers one, this can be a great way to stash away tax-deductible money for future healthcare costs. It works like a 401(k) in many ways; you can put money aside that grows tax-deferred until you pull it out for qualified healthcare expenses. The only caveat is that in order to take advantage of an HSA, you must be enrolled in a high-deductible healthcare plan.
Second, long-term care insurance can be a good way to protect your nest egg should you need help with daily activities, but not be ill enough to need hospital care. Long-term care insurance is cheaper the earlier you buy it, so look into it before you plan to retire.
Have you fallen victim to any of these retirement pitfalls? How’d you recover?
Editor’s Note: I’ve begun tracking my assets through Personal Capital. I’m only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it’s much easier to figure out when I need to rebalance or where I stand on the path to financial independence.
They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it’s free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.