There's much more to retirement planning than accumulating a large next egg. You'll need to invest and protect your retirement savings, account for health care expenses, and turn your savings into a stream of income. Unfortunately, there's a lot of room for mistakes that could force you to cut your standard of living in retirement. Here are 10 things that could derail your retirement plans:
Too much debt. Americans are increasingly entering the traditional retirement years with credit card, mortgage, and other forms of debt. But carrying debt into retirement means your savings will have to support past expenditures, plus interest—as well as your current spending. "If you have debt and you are going into retirement, I don't think you are ready for retirement," says Gary Gilgen, a certified financial advisor and director of the financial planning department at Rehmann Financial in Troy, Mich.
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Underestimate how long you will live. The average man who is currently 65 can expect to live until age 83, and a 65-year-old woman can expect to live until 85, according to Social Security Administration data. There is about a 1 in 10 chance that current 65-year-olds will live past age 95, according to SSA. "Some people die right after retirement and some people live many years beyond their life expectancy," says Scott Peterson, a chartered financial consultant for Peterson Wealth Advisors in Orem, Utah, and author of Maximize Your Retirement Income: Powerful Financial Strategies for a Successful Retirement. He recommends a cautious strategy—planning as if you will live until age 100.
Retire too young. Perhaps the biggest retirement decision you will make is when. Sometimes retirement is foisted upon you unexpectedly because of a buyout or layoff, or it is necessitated by a health problem or caregiving responsibilities. Retiring young means more years of retirement that you'll need to finance with savings. Monthly Social Security benefits are reduced for early claiming. "Many people are retiring too early and taking Social Security at the earliest possible time, and that's a mistake," says Peterson. "If you simply wait from age 62 to age 66, you will increase your monthly Social Security payment for the rest of your life." Someone born in 1950 who would have been eligible for a $1,000 monthly check at age 66 will receive 25 percent less—just $750 each month—if he or she signs up at age 62.
Don't purchase enough insurance. Americans age 65 and older are eligible for Medicare coverage. But you will still need to pay premiums, deductibles, and coinsurance unless you purchase supplemental insurance. There are also a variety of common services that traditional Medicare doesn't cover, including eye glasses, hearing aids, and long-term nursing home care stays of more than 100 days. Families with significant assets to protect may want to consider long-term care insurance. Prescription drug costs vary depending on which Medicare Part D plan you choose. Shop around annually for the most affordable plan in your area that meets your prescription drug needs.
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Ignore inflation. Over time, inflation will slowly decrease the spending power of your savings unless you take steps to protect it. Social Security payments and some annuities and pensions are adjusted for inflation each year. One type of government bond, Treasury Inflation-Protected Securities (TIPS), promises a rate of return above inflation. Other common hedges against inflation include exposure to the stock market, commodities, or real estate.
Neglect your social life. Once you retire, there are no more work obligations and no one will be counting on you to finish a project or meet a deadline. It's easy to feel isolated. "A lot of people have been totally immersed in their work and have not taken time to develop outside interests, and when they retire they are just totally lost," says Robert Christenson, a certified financial planner for Net Worth Advisory Group in Midvale, Utah. "It's important to prepare for retirement by developing a hobby or interest outside of the workplace and planning what you are going to do in the retirement years." Consider which friends you will spend time with and what activities you will take up. Try to coordinate retirement with your spouse and discuss how your routines will change.
Rely on a single source of retirement income. While most working Americans get their income from a single source, retirees shouldn't count on any one income stream. "You should have between four and six sources of retirement income, and don't count on any one of them," says Gilgen. Guaranteed sources of retirement income include Social Security payments, pensions, and annuity payments. Other common retirement income sources include 401(k)'s, IRAs, personal investment accounts, cash investments such as savings accounts and CDs, and rental or royalty income. Diversifying income sources ensures that if any one of them loses value, you will still have some money coming in.
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Don't save enough. There are many reasons why it's difficult to save for retirement. A home purchase, college costs, and even everyday expenses often compete with your retirement savings. A few easy ways to grow your nest egg include setting up a direct deposit into a retirement account, saving enough in a 401(k) account to receive an employer match, and remaining in a job long enough to be vested or eligible to keep the match. If you haven't saved throughout your lifetime, you generally can't make up for it by investing in high-risk and potentially high-reward funds close to retirement. "It's hard to make up for a lack of saving in a couple of years," says Christenson. "It's taking a huge risk and it usually works against people."
Fail to protect your savings. As you approach retirement, you should shift your focus from growing your nest egg to protecting it. "When you get within five or 10 years of retirement, you need to start reducing your risk," says Christenson. Consider shifting some of your assets into more conservative investments. Avoid loans and early withdrawals from retirement accounts, the latter of which come with a 10 percent tax penalty and regular income tax on the amount withdrawn. Also, try to minimize the fees and taxes deducted from your retirement savings. Shop around for low-cost investments, contribute as much as possible to tax-advantaged traditional and Roth retirement accounts, and develop a retirement account withdrawal strategy that minimizes the income taxes you pay as you take money out.
Neglect to support a surviving spouse. One spouse often lives considerably longer than the other. "You don't want the unhealthy spouse to use up all your assets and leave the healthy spouse destitute," cautions Joe Luby, a certified financial planner and president of Financial Solutions Inc., in Las Vegas. Find out what your survivor's payments will be from Social Security and any pension or annuity plans you have. If that won't be enough support for the surviving spouse, you may want to purchase life or long-term care insurance. Your retirement savings needs to last throughout both of your lifetimes.
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