5 common retirement planning blunders – and how to avoid them

November 20, 2014

By Pam Leibfried

5 common retirement planning blunders – and how to avoid them

The greatest financial fear for Americans is whether they’ll have enough money for retirement, and that fear is not unfounded. Nearly 40% of Gen Xers and baby boomers are at great risk to run out of money during retirement, according to the Employee Benefit Research Institute.

Retirement is supposed to be a relaxing, enlivening time. And no matter how old you are, if you’re an adult, the time to plan or fine-tune your plan to pursue a comfortable retirement is now. As you head toward retirement, avoid these common mistakes.

Retirement planning blunder #1: Do nothing

Some people have a false sense of security, assuming that things will simply work out for them. Don’t wear those blinders. On the other hand, there are people who are scared, overwhelmed and quite unprepared for retirement. In this fight or flight scenario, the best course is to face reality square on and develop a smart strategy to save and invest. The old cliché applies: failure to plan is to plan to fail.

Retirement planning blunder #2: Rely on Social Security and Medicare to adequately take care of you

Neither program is sufficient to carry you through retirement. Today, the average monthly Social Security benefit is $1,500 – providing a single person a yearly income just above the federal poverty line. Best to supplement that payment with other sources of income. Medicare, available to those older than 65 and younger people with disabilities, is a boon, but isn’t comprehensive. Often, it only covers a part of your doctor visits and treatments. Most eye, dental and hearing care are not covered. And if you need long-term care, the government will contribute nothing toward the tab. Bottom line: a 65-year-old couple who retired in 2020 will need, on average, nearly $300,000 to cover the bills Medicare won't cover during their retirement years.1 Because of this imposing number, it may be worth looking into the cost/value of buying Medigap and long-term care insurance policies to handle your healthcare expenses.

Retirement planning blunder #3: Don’t visualize what you want your retirement to look like

Some people head toward retirement without a clear image of what they want. Some questions to ask yourself include:

  • When do I want to retire?
  • Where do I want to live in retirement?
  • What do I want to do when I retire? (Travel, sports, hobbies, community work, etc.) 

Retirement planning blunder #4: Don’t make a budget for your retirement

Only 42% of Americans have actually calculated how much money they'll need to save for retirement, according to the Employment Benefit Research Institute. Don’t be part of that crowd. First, you’ll need to keep track of your current expenses and quantify what expenses you expect to have during retirement. Consider that, especially early in retirement, people who enjoy good health often spend more on travel, entertainment and dining out. If possible, set aside extra money for unforeseen emergency expenses, such as medical issues and home repair. And remember to factor in inflation. How much will you need for retirement? Here are a couple of rules of thumb. The magic number used to be $1 million, but that’s been adjusted upward. However, if you’re like 95% of Americans, you don’t have $1 million and you’ll have to work with the money you do have. Other financial experts say, ideally, you will be able to draw 70% to 80% of your current annual salary. At any rate, once you develop a retirement budget, give it a test drive prior to retirement to gauge whether it’s realistic.

Retirement planning blunder #5: Put all your investment eggs in one basket and let it be

Every investment has a trade-off, even those designed to protect your principal. Being totally aggressive can lead to a fall. Sure, different products can be risky. But when you invest in them for the long-term (say, 20 or 30 years) rather than a couple of years, the peril of a market crash is mitigated by time and provides the opportunity for your money to work harder. Being totally conservative also has its drawbacks – the returns on CDs and bonds can be eaten up by inflation. The answer is to diversify with a mix of risky and more conservative investments, including stocks, bonds, savings and contributions to a 401(k) and/or IRA. The goal is to generate enough income throughout your retirement.

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