Starting to save for retirement is usually the hardest step to take. But there are many other mistakes you can make, even if you regularly deposit a portion of each paycheck in a retirement account. Make sure you remember to take into account these common retirement mistakes so they don't derail your path to a financially secure retirement.
Failing to account for inflation. People often underestimate the enormous impact that inflation will have on their nest egg. I recently spoke with a young entrepreneur who sold his company and was left with $5 million in the bank. He wanted to retire, citing that he would be well off with an income of roughly $200,000 a year if he invested the money in 30-year treasury bonds. But that doesn't factor in inflation. Since he is only 30 years old, the buying power of $200,000 annually will be much less by the time he's 65 or when he's 80.
Forgetting that some assets still need to be taxed. Whether your retirement savings is in pre-tax or post-tax accounts will have a big impact on how much of it is available for spending. Retirement savers are increasingly accumulating sizable pre-tax retirement accounts. The amount of taxes you will owe upon retirement should be factored into your retirement spending calculations. No matter how much you have saved for retirement, ordinary income tax rates will take a huge bite from your pre-tax assets in retirement.
Suffering from the recency effect. Numerous studies have shown that most people are more conservative with their performance estimates right after a bear market. That’s great for people who will be retiring soon because I don't think you can ever be too conservative in your retirement savings calculations. On the other end of the spectrum, though, this same phenomenon could be disastrous if you overestimate your retirement portfolio's performance near the end of a bull market and don't make enough effort to save. Though history is never an indication of future performance, historical data can act as a guide to help you understand and come up with a reasonable estimate.
Thinking that there's only success and failure. Whether it's starting a retirement fund or upping your savings rate, any amount you can save helps a little bit. Many people are so far behind that they give up saving because they feel that they will never get to where they should be. While that may or may not be true, any additional dollar you set aside for retirement means one more dollar that will be available for spending when you need it most. If you manage to save enough to have 70 percent of your pre-retirement income, that's a world of difference from having only enough money to replace 30 percent of your current salary.
Not asking for a second opinion. Some people don’t want to pay for financial advice or take time out of their schedule for an appointment with a financial planner. You could even feel embarrassed about your retirement planning shortcomings. But failing to ask for a second opinion could cost you a huge amount in retirement. Even if your plan is rock solid, an objective eye can help spot inefficiencies in your plan. And if your retirement plan is absolutely perfect, a professional reassurance helps you build even more confidence that you are on the right track.
David Ning runs MoneyNing, a personal finance site aimed at helping others change their habits for a better financial future. He suggests that everyone to sign up for an online savings account to get more out of our hard earned money.