Watching the sunset on the beach every day. Doing a cross-country road trip whenever you feel like it. Finally devoting time to that hobby you’ve been dreaming of turning into your full-time gig.
If you’re like a lot of folks, one or all of these are something you want to do in retirement someday. And to help turn these visions into reality, you’re probably contributing to a 401(k) or IRA, hoping that compound growth will help you build a nest egg sizable enough to make those dreams come true.
But preparing for retirement doesn’t stop at saving. There are a lot of moving parts that will factor into how you plan for your post-working years, and it’s easy to overlook them—just ask these personal finance pros, who share some of the biggest mistakes they’ve seen people make when it comes to planning for retirement.
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Keeping Your Head in the Sand
In speaking to thousands of pre-retirees each year, I see the impact of planning—and not planning—for retirement daily.
I can say that one of the most prominent obstacles to saving adequately for retirement is the fact that it is easier to ignore retirement than to face it: Most people spend far more time planning a family vacation than they do planning for their financial future! After all, a family vacation is fun to plan, but retirement planning can be scary and overwhelming, and people are often afraid of making the wrong decision.
But when I meet people approaching the retirement window, the most common theme I see is the painful sting of regret of not taking action earlier in life to reach their financial goals. Here's the reality: Not making a decision is a decision—it just doesn't yield the outcome you likely want. If you think feeling overwhelmed now is bad, imagine how overwhelming it will feel not to have enough money in retirement to pay your bills, afford your medication or live the lifestyle you spent your whole life saving for.
Taking action is the key to overcoming the overwhelming. First, define success—that is, what do you want and when do you want it? Next, determine the path you're willing to blaze to get there. If you have clearly defined goals, saving for retirement doesn't seem quite so scary.
—Chris Kowalik, federal retirement expert, ProFeds, Chicago area
Being Too Optimistic—or Pessimistic—About Retirement
Sometimes people have a hard time getting a realistic grasp on their financial situation and either have saved too much or too little but have no idea which it is. I have had clients who have no retirement savings, investments or pension and swear up and down that in six months when they turn 62, they’ll be able to retire, buy whatever toy they have been dreaming of, travel the world and live in glory—regardless of the fact that they will be living on Social Security, their home is mortgaged to the hilt and their business or job is not going to provide any real amount of retirement income.
The same goes in the other direction, with clients who insist they’ll have to keep working in retirement—that even with their giant nest egg, excellent pension or whatever other resources they have, they can’t seem to accept that they’ll be able to stop working, or at least work a little less. I think a lot of times when you see these situations, it is tied to an emotional reason or something from deep in their history. For that reason, I don’t think data, graphs or charts really help unless I’m using them to augment the conversation. So I try to get them to understand their situation by asking deeper questions and listening to their answers without judgment.
—Scott Vance, financial planner, Trisuli Financial Advising, Raleigh, North Carolina
Not Holding a Diversified Portfolio
Many employees have a significant portion of their retirement portfolio invested in their own company’s stock. Some employees maintain this exposure over long periods of time, often into retirement, because they are familiar with the company or simply feel some obligation to maintain positions in who they work for. But this type of overexposure can greatly increase the risk of a portfolio.
If you only own one stock, and something bad happens to that specific company, then the value of your retirement portfolio is going to take a big hit. It’s the same concept as putting all your eggs in one basket. To help keep investing risk in your portfolio in check, where possible, allocations to any single company should be minimized in favor of a well-diversified portfolio with exposure to many companies, industries and asset classes.
—David Walters, CFP®, portfolio manager, Palisades Hudson Financial Group, Portland, Oregon
Forgetting About Taxes
People tend to underestimate the impact of taxes on their retirement income because they simply don’t think about it. They generally contribute to a traditional 401(k) at work, which means they don’t pay income tax on that money and it grows tax-deferred. But when they begin to take distributions, which they can do after age 59½, the IRS will tax them on whatever they take out at the regular rate of taxation. So if their tax rate is 25%, their 401(k) is only 75% as valuable as it seems. And that’s not taking inflation into account!
To minimize the impact of taxes, I advocate to clients I work with to consider putting a portion of their after-tax income into tax-free retirement vehicles too. By paying tax on the money before it grows, it’s less painful—think of it as paying tax on the seeds rather than the harvest. Then they will have taxable and tax-free buckets from which to draw, balancing out their tax liability later on.
—Tracey Lawrence, retirement consultant and founder of Grand Family Planning LLC, Ringwood, New Jersey
Assuming You’ll Be Able to Work Into Old Age
Many people believe they can simply exercise an option to work longer if their savings aren’t sufficient. People have this mentality because Americans are living longer, but that isn't consistent with what actually happens. In fact, a 2014 Gallup poll found that working Americans expect to retire at age 66, but found the average age of retirees to be 62.
What people fail to realize is that oftentimes Americans are living longer but not necessarily living better. They may be forced to retire before they are ready because of their health or the health of a loved one, because of downsizing and mergers or because businesses fail. What I tell clients is this: If possible, build in a margin of safety into your retirement plans so you can cover being forced to retire earlier than planned or living longer than the actuarial averages. You may accumulate more than you need, but that circumstance is much better than not accumulating enough and having to substantially lower your standard of living in retirement.
—Robert R. Johnson, president and CEO of The American College of Financial Services, Bryn Mawr, Pennsylvania
Not Factoring in Health Care as a Major Retirement Cost
Many retirees are unaware of the high price of the potential healthcare costs they may need to plan for throughout retirement. One estimate by HealthView Services finds that couples retiring in 2015 may have to spend between $266,000 and $394,000 on health care throughout retirement. These figures are shocking!
What’s even more shocking is the number of people who don’t factor health care into their retirement plan adequately enough. What I stress to my clients is the importance of understanding the three main factors that can impact their own costs: When do you plan on retiring? What is your health status? And how long do you think you may live?
—Ronn Yaish, wealth advisor, Yaish Financial, Bergenfield, New Jersey
Not Accounting for Long-Term Care
When you're young and healthy, it's easy to overlook what could happen to your health as you age. It's not fun to think about getting sick or even disabled, so it's no wonder many people overlook long-term care. Unless someone you know has needed long-term care, you would be surprised by how much health care and nursing homes cost, and Medicare and health insurance plans do not cover long-term care.
My advice: Consider getting long-term-care insurance. A typical policy will help pay for adult day care, respite care, stays in Alzheimer’s special care facilities, assisted living facilities, nursing homes and hospices. It also typically covers services in the home like skilled nursing care, rehabilitation therapy and personal care like bathing and dressing.
—Patty Cathey, investment advisor, Smart Retirement LLC, Denver
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.