If you’re thinking about your financial future, retirement planning is one aspect you can’t overlook. But retirement planning is one of the most difficult financial tasks, as it came with some issues. Your ability to save can be impacted by your salary, debt, expenses, etc. Plus, there is no one-size-fits-all approach to retirement.
To build the right plan, you need to avoid retirement myths and stop working at an optimal time to ensure you have enough savings. Failing to be proactive can result in stress and worry over your financial future.
To help you get your financials in order, we will walk you through six common retirement planning issues and mistakes and how you can avoid them.
Spending Too Much
It’s never too early to start thinking about retirement. And one common mistake people make is spending too much money, whether before retirement or in their golden years. High spending can damage your retirement plans. If you’re older and on a fixed income, having high expenses can shrink your budget for other important areas, like living expenses. It can also mean the difference between being able to afford nice retirement vacations or not. Remember to make a budget that limits frivolous spending so you can put the money to work in other ways.
Not Taking Your Health Into Account
It’s not easy to talk about, but considering your health is an important and often overlooked aspect of retirement. As we age, we become more susceptible to being unable to work due to our health. One way to protect against this is to invest in annuity contracts. Contributing to an annuity is a great way to receive fixed monthly payouts when you decide to retire. Many annuities also allow you to cash out in case of an emergency.
Life insurance is another excellent way to manage the risk of becoming sick and being unable to provide for yourself and your family. Life insurance is often extremely cost-efficient compared to other types of insurance.
Failing to Diversify Your Savings
What if you think you’ve saved enough, but all of your retirement plans are based on a single type of saving? Failing to diversify is another financial mistake many people make.
A great example of this is relying on a company-funded retirement. Depending on your retirement terms, you or your spouse may not receive any money if you retire early or lose your job. In the 2008 recession, many workers were put in this situation as they found themselves laid off or forced to relocate as factories closed their doors and shut down assembly lines, ultimately damaging the reputation of their organizations. Avoiding this problem is as easy as contributing to different retirement savings accounts and picking multiple sources for your income later in life.
Contributing Too Little to Retirement
One of the most obvious problems is not saving enough for retirement. However, it’s always helpful to be reminded to monitor how much you contribute to retirement. To maximize how much money you have when you retire, it’s key to save the right amount.
For example, starting with an initial investment of $5,000, a monthly contribution of $200 and a 3 percent interest rate will yield $126,317.31 after 30 years (compounded yearly). On the other hand, investing $10,000 initially and contributing $300 every month over the same period with the same interest will yield $195,544.12.
As you can see, putting just $100 more towards retirement every month makes a huge difference in the long run. Consider checking out a retirement calculator to see how much you could save for retirement.
Starting Too Late
This is a big one on our list of retirement planning issues. On top of contributing too little, another major problem is starting too late. I can personally attest to this problem myself. In my 20s, I had difficulty holding down a job and saving my money. Now that I am older, I can only wish that I had started saving sooner. Luckily, many Millenials save money earlier than other generations.
By educating yourself and saving today rather than tomorrow, you’re setting yourself up to be financially secure well into your later years. Earlier I walked through some examples detailing how saving more can yield greater benefits in the future. But what if you saved for longer (meaning, started saving sooner)? If you invested $10,000 initially, contributed $300 every month, and only had a 3 percent interest rate over 40 years, you would have $304,064.91 when you retire. That’s an increase of over $100,000! Not bad!
In the end, it’s all about contributing the maximum you can and starting as soon as you can.
Overestimating How Much You’ll Receive in Retirement
In retirement, your income is usually made up of two or three parts. The first part is Social Security, the second is a pension (if you have one), and the final part is your savings. Social Security is automatically deducted from your paychecks every time you get paid. The earliest you can start claiming Social Security is at 62. However, choosing to retire before the full retirement age will reduce your benefit by 30 percent.
Pensions are less common today, but typically they are a type of employer-funded benefit. Finally, there are personal savings, which are made up of money you have saved throughout your working years.
In the end, these separate sources all make up your income after you retire. It’s important to understand how much you will receive from each of these sources to estimate the amount you will receive accurately.
According to a survey, more than half of Americans haven’t saved enough for retirement. If you are a part of that group, take a step back and look hard at your retirement planning strategies. Examining your plan and taking corrective action now will put you ahead when the time comes to stop working. Get your expenses under control, start saving more, and diversify your assets. It’s the only way to enjoy a comfortable life after you retire.