Deciding to make a plan for retirement is a great first step. But there are no guarantees that your saving and investment strategy will lead to a secure retirement. Once you start your plan, make sure you take care to avoid these seven retirement mistakes.
Readjusting to new numbers too quickly. Many people recalibrate their retirement account withdrawals based on recent market events. For example, let's say you have $1 million saved for retirement and, adhering to the 4 percent rule, you withdraw $40,000 in the first year and a bit more the next to account for inflation. But let's say that the market has performed well the first five years of retirement and your account balance grows to $1.5 million after withdrawals. While you could begin taking out $60,000 annually and still adhere to the 4 percent rule, it might be wise to continue to withdraw closer to $40,000 and save the excess for years when your investments don’t perform as well.
Not planning at all. This point is pretty obvious, but most Americans don’t have enough saved to finance even a few years of retirement. Until statistics show that everyone has a retirement plan, this point needs to be drilled into everybody’s head.
Trying to come up with a retirement number without facts. Too many people are simply guessing how much they spend each month. You don’t need to know where every single penny is going, but you should at least have a good idea of how much money you need by having a budget. Knowing how much you spend is key to figuring out how much you need to save for retirement.
Not getting a second opinion. The worst case retirement scenario is running out of money too soon and having to depend on your children or significantly reduce your standard of living. With stakes this high, ask a second person to take a look at your retirement plan just in case. Even if you are absolutely confident in your retirement plan, a financial professional is trained to spot potential problems before they happen. If you don’t trust financial advisers, then perhaps even a trusted friend or family member could help.
Comparing yourself to others and thinking that's good enough. Many people think they will be okay in retirement because they are saving 10 percent of their paycheck for retirement and that's what everybody else is doing. But, depending on how much you spend, 10 percent of your salary may not be enough to maintain your current lifestyle. Our national retirement preparedness is not as bad as the media sometimes makes it seem because Americans are incredibly good at making do. That being said, many Americans don't have enough saved for a stress-free retirement. Saving more than the typical American does not mean that you are saving enough to support yourself without working.
Believing that retirement planning is only about financial numbers. While the financials are extremely important, your retirement plan should include non-financial planning too. Where do you plan to live? Will you downsize your house? How are you going to spend your time each day? You need to develop a plan to fill all the time when you used to be working.
Forgetting to figure out how you will turn your nest egg into an income stream. Turning a nest egg into steady income streams isn't trivial. You need to make sure that you have a plan in place to draw down your retirement savings without spending it too quickly or unnecessarily. You don't want to waste the money that you've worked so hard to save.
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.