Retirement is always a topic where many people try to avoid. Just the though of planning for retirement gives us headaches.
Facts and figure on how much you need to retire is not that encouraging either.
A study conducted by Economic Policy Institute shows that the average american will retire at age 66 and will live till 79 years old.
On a positive note, with the advance in our medical technology, the average life span will increase up to 82 and 85 for man and woman respectively. Which means, you will live longer after retirement.
But are you truly prepared for retirement?
A typical couple of age 56 to 61 without any retirement accounts have around $17,000 in savings. This is barely enough to live for just a year after retirement.
On the other hand, a typical couple of age 32 to 61 with a retirement account have a mean of $95,776 in savings. This allow them to enjoy their retirement for at least a few years before it is depleted.
Other studies shows that:
Only 5 in 10 individuals have some sort of retirement plan, most are depending on either pension or support from family members.
Even with pension, the median annual pension amount for Americans who have the old-fashioned defined-benefit plan is only $9,376, according to CNBC.com.
Retirement Planning is a long term planning that we all need to do. Not planning your retirement properly will only cause you to suffer at your old ages. Your peers who have a good retirement plan maybe are enjoying at the beach, while those who fail to plan will be forced to work just to pay their bills.
Even in retirement planning there are a few mistakes that can cost you your retirement dreams.
These worst mistakes in retirement planning are called,
“Seven Deadly Sins of Retirement.”
Learn to avoid these mistakes and make your retirement as comfortable as possible.
A retirement life should be a life you will love to have and enjoy.
Let’s Dive In!
7 Deadly Sin of Retirement
There are many mistakes you need to avoid in order to retire comfortably. But of these hundreds of mistakes, here are the 7 worst mistakes you have to avoid at all cost.
1. Underestimating medical expenses
You are healthy and young. You will probably not think about the medical expenses. Some will even term it the “it won’t happen to me” problem. But in reality, you will almost certainly encounter some type of serious health problem if you live long enough.
And these health problems usually comes at the age when you are about to retire or when you have retired.
A simple survey done just recently shows that 90.2% of all respondents have no idea of what their future medical expenses will cost. 75.3% said they have no strategy for paying their post-retirement medical cost at all!
This results is shocking and medical expenses is definitely a problem which we will face in the future.
As part of our retirement planning, we should always factor this unexpected expenses to ensure, our health will be well taken care of.
How to Fix
But first, we need to know how much do we actually need?
A report by Fidelity shows that for an average Person living in the first world country such as United States, Australia, Canada and Singapore will estimate up to $200,000 over the entire post-retirement lifespan.
What You Can Do:
- Buy a supplement health insurance coverage to ensure that your post-retirement medical bills are taken care of.
- Plan for long-term care as well such as long-term care insurance, or make plan for whom to care for you
- Plan for assisted care provided by a facility, or in-home care service.
2. Post-retirement spending spike
Spending spike? It usually comes as a surprise to many people, but our research says, retirees spend more not less. Well, at least for the first few years.
Some term it the “I am free” symptom.
We see all these new born retires who are finally free from their 9 to 5 jobs and are free to do the things they always wanted. Ranging from travelling the world to golfing at the Maldives (Is there a golf course in the Maldive?).
A few years down the road and when they finally look at their budget, they have spend way too much to last their retirement.
How to Fix
When it comes to spending, the best advice we can give is to make a budget. Like the home budget article we have written previously. Budgeting for post-retirement spending is just as important.
What You Can Do:
- Set a post-retirement budget
- Track your spending
- Downsizing to what you need
- Keep cost under control
3. Keeping too many cars
Sometimes, keeping a second car make financial sense. It may have a better gas mileage, bigger in size so that you can fit the whole family.
But having an extra car which you seldom use can be very bad for your finance as well. It adds up the cost of your maintenance, taxes or simply occupying space which can be better used.
How to Fix
If you have a vehicle you don’t really need and is collecting dust. Consider giving it to your grandchildren or charity and take a tax write-off.
This simple act will save you hundreds every month on gas, insurance and repair cost.
The other option is to rent out your second vehicle which you seldom use. Getting a few hundred dollars per month for renting out your vehicle will definitely help you in your retirement expenses.
For those, who seldom drive, not owning a vehicle and consider using public transportation can also help to save the environment. Some may even consider walking or biking for the added health and fitness benefits.
4. Moving House
Moving to an area with a lower expense can be beneficial for retirees to help them retire comfortably. But some moves can lead to unexpected circumstances which the retiree will regret in the future.
- There are some retirees who sell their homes and downsized, only to discover that they are paying a much higher property taxes in their new but smaller home.
- Others moved to an area with a lower property taxes but higher transportation and food cost, because the new area requires more travelling and a fewer shops available.
- Going to live in an area where it is pleasant for couples but lonely for a single person can be quite sad, in the event of death of the other half.
Perhaps the most common scenario is the inconvenience of moving to an area which you know nothing about. You have to adapt at your old age that lead to your retirement life to be less than comfortable.
How to Fix
Proper planning will probably the best way when getting a comfortable retirement life.
Before choosing the area to move for retire, investigate carefully for all the different cost or problems you may face. Talk to the retirees who are living there and get to know what are the problem they are facing.
Before choosing where to move to retire. You may want to consider these few factors:
- Accessibility to age-related medical care
- Availability of public transport
- Ease of access to common shops
- Cost of living
- Cost of travel to visit your friends and children
- Availability of a social community for support and social life
- Availability of an economy which allow you to work part-time in case you change your mind
- Avalibility of a senior service
Discuss with your adult family members before making any big decisions. Pay close attention to the resale value of the house as well. If you are unsure of your plan, you may want to consider temporary move to your new area while renting out your current home. Should you change your decision in the future, you will still have a place to stay.
5. Getting sold or scammed
We know most people are honest and nice. But it is always better to be more wary of the scammer and those who are less honest out there. Some scam may not be as obvious as you may though.
When you are retired, your needs changes. Some of the financial products and services you brought when you are young may no longer make sense.
For example, if you have brought your life insurance for the purpose of replacing lost income for your dependent, you may no longer require it anymore.
Older adults are almost always the target of some untrustworthy individual who will sell annuities, insurance policy and investment that may not be the best fit for their customers.
For your record, frauds and scams aimed at older individuals are on the rise.
How to Fix
Perform an annual review of all your insurance policy to see if they still make financial sense. Consult a reputable financial advisor to help you in the process.
Get a fiduciary financial advisors to help you in the process and not just any other self-proclaimed financial advisor.
A fiduciary financial advisors is to abide by fiduciary duty which is by law, that he or she will have the ethical obligation to act solely in your best interest.
Your financial advisor will help you analyse the risk and benefit of each type of policy you hold and give you advise which will give you the most benefit.
Be extra careful to anyone who is trying to sell you anything. When the deal sounds too good to be true, it is too good to be true.
Lastly, don’t make any financial decision under pressure. If you are in doubt, it is your gut feeling telling you ‘No’. Make all financial decision carefully and slowly.
6. Putting Savings at the Wrong Place
Savings for retirement is one of the most important decision that we make during our work life. But putting the saving in the wrong place can be very bad for our retirement planning too.
Inflation eats up 2% to 4% of our savings every year. In other words, your buying power get smaller and smaller each year.
An average of a 3% inflation rate over 30 years on your current saving of $100,000 will have a buying power of $41,199. Your buying power have just reduce to less than half due to a 3% inflation rate!
Fear leads most people to put their money in bank and avoid all other forms of investment that may cause them to loss money. Banks on other hand gives an interest rate which is usually much lower than the inflation rate.
In other words, by putting your savings in bank, you are sure to loss money due to the inflation rate.
How to Fix
A balance of risk and reward might just be the answer to this. Interest rate in bank usually give a low interest rate that will not beat inflation. This lead to saving for retirement a very tough task to do.
When it comes to retirement, diversification might be the best way possible to have the maximum reward and lowest risk.
Most financial advisor can help you in this area, to help you plan for your retirement.
But for me, as I like to learn about investing and maintain my own portfolio, I buy a mix of bonds, REITs and ETF. You can also read my other article on how I plan to earn $50,000 passive income for retirement through investing.
Avoid buying individual stocks, if you are planning for retirement, as you will not know what will happen for that particular stock in the future. This holds true even for blue chip stocks.
“You diversify by spreading your investments over different asset classes, some will go up, others go down, but your portfolio will smooths out the bumps in the market,”
If you are investing on your own, the best way to obtain this balance is to choose low-cost index funds.
7. Retiring too Soon
According to Social Security data, average life expectancy is 79 and in the next 5 years, at least one member of a 65-year-old couple to live another 23 years, to age 88. Whats more surprising is that, one-third of all retirees will live to age 92.
This means, if you are retiring at the age of 65 years old, you are expected to have savings to cover 14 to 27 years of retirement.
That is a lot of years of retirement!
Imagine you start working at 25 and stop working at age of 65. You have work 40 years of your life. And in these 40 years of your work life, you will need to cover your expenses of 14 to 27 years of your non-working life.
That is a lot of money you will required to achieve a comfortable retirement life
How to Fix
Retirement is a time where you want to relax and enjoy, but unless you have no choice because of health problem or unable to find work. Plan to keep working as long as possible to maximize your social security benefits.
The increase of benefit and minimizing of your non working years can mean a huge different in your finance at your retirement.
Aim to work till 65 or 70 before you plan to retire unless, you have another way to make an income to finance your retirement.
As for me, I choose to perform investment now to build up a passive income to help finance my life when I retire in the future.
Investing in Bonds, REITs or ETF gives dividend periodically and when done properly, it can be made into a passive income to finance our daily expenses.
Retirement planning is a long term planning which is as important as home budgeting. When you wants to retire comfortably, you want to avoid these few worst retirement planning mistakes.
You have worked hard for the most of your life and retirement should be fun and enjoyable. You want to just enjoy the sunlight in the beach with a cocktail in your hand. Money should be the last thing you should ever worry.
Since, we are on the topic of retirement. Here is an article where we talk about preparing for your retirement. Probably you may want to check it out as well.
Read Also: How much do you need to Retire?
If you are interested in retirement numbers, here is an retirement calculator for you to calculate how much do you actually need for retirement, if you do not create an passive income steam.
Tools: Retirement Calculator
There are definitely many other ways of making passive income for retirement, but these mentioned in this article are some of my favorites!
Read Also: Passive Income vs Active Income
Remember! If you want it badly enough to be financially freed and have control on your own life, you will do what it takes to achieve it!
Trust me, it will definitely be worth it!
Part 4: 5 Steps to Save $10,000 a year
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Disclaimer: I am not your financial adviser or lawyer, information found in our website are just my opinions. You should always ask your financial adviser or lawyer for any financial or law related advice.