Retirement planning is an art as much as a science. No one can accurately predict how much money they will need or which challenges life will bring in the coming decades. But avoiding these common situations can help you better prepare for retirement.
1. Carrying debt into retirement. Debt is the number one killer of retirement dreams, especially if you continue adding to your debt at a time when your income either stays the same or drops. It can be challenging living on a fixed income, but it is even more difficult if you have a fixed amount of your income going toward debt each month. One of the most important things you can do before you retire is completely eliminate your debt, including your mortgage if possible. Here are some tips for lowering your mortgage payments to help you pay it off more quickly.
2. Relying on someone else. Many retirees have social support structures in place, often in the form of a pension, employer health benefits, Social Security, or survivor benefits. These plans can be an important part of your retirement planning, but none of these should be your only source of retirement income. This is especially important for men and women who rely upon their spouse's retirement benefits as their sole source of income. Survivor benefits are often much less than the full benefit, which can lead to major problems if you outlive your spouse by a couple decades. Waiting a few years before taking benefits can help you increase your Social Security payments. It’s also a good idea to invest on your own. Consider opening an IRA or a taxable investment account to augment your other retirement benefits.
3. Living like you always have. Retirement comes with a new set of financial rules. You don't necessarily have to change your life dramatically, but you may have to scale back if your retirement income is substantially less than your pre-retirement income. Take the time to create a retirement budget before you make the decision to retire and try living on it for a few months to see if you can do it. If you have to stretch to make it work, then consider delaying retirement until you can either beef up your savings or eliminate some of your monthly expenses. Remember, if your budget is tight now, it will likely get worse as inflation causes prices to rise.
4. Not insuring yourself properly. You probably already have standard insurance policies such as homeowner's insurance and car insurance. But most people are underinsured for long-term care and life insurance. Take some time to meet with an insurance specialist to determine how much life insurance and long-term care insurance you need. These insurance policies generally become more expensive as you age, but not having it can be more expensive in the long run.
5. Being too aggressive (or not aggressive enough). Having 100 percent of your investments in stocks is probably too aggressive for most investors, especially those who are nearing retirement age. On the flip side, having everything in more stable investments such as CDs or bonds may not be aggressive enough. Most investors should aim for somewhere in the middle, depending on your age, risk tolerance, and the size of your investment portfolio.