If you’re thinking about your financial future, planning for retirement is something you can’t overlook. But planning for retirement is one of the most difficult financial tasks. Your ability to save can be affected by your salary, debts, expenses, etc. Moreover, there is no one-size-fits-all approach to retirement.
To build the right plan, you need to avoid retirement myths and stop working at an optimal time to ensure you have enough savings. Not being proactive can lead to stress and worries about your financial future.
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Retirement Planning Problems Most People Have and How to Avoid Them
To help you get your finances in order, we’ll walk you through six retirement planning mistakes and how you can avoid them.
spend too much
It’s never too early to start thinking about retirement. And a common mistake people make is spending too much money, whether before retirement or in their prime. High expenses can hurt your retirement plans. If you’re older and on a fixed income, having high expenses can cut into your budget for other important areas, like living expenses. It can also make the difference between being able to afford a great retirement vacation or not. Remember to make a budget that limits frivolous spending so you can use the money in other ways.
Disregard your health
It’s not easy to talk about, but health is an important and often overlooked aspect of retirement. As we age, we become more likely to be unable to work due to our health. One way to protect yourself is to invest in an annuity contracts. Contributing to an annuity is a great way to receive fixed monthly payments when you decide to retire. Many annuities also allow you to cash out in an emergency.
Life insurance is another great way to manage the risk of getting sick and being unable to support yourself and your family. Life insurance is often extremely cost effective compared to other types of insurance.
Not diversifying your savings
What if you think you’ve saved enough, but all your retirement plans are based on one type of savings? Not diversifying is another financial mistake many people make.
A good example of this is relying on a company funded retirement. Depending on your retirement conditions, you or your spouse may not receive any money if you retire early or lose your job. During the 2008 recession, many workers were put in this position as they found themselves laid off or forced to relocate as factories closed and assembly lines closed, eventually damage the reputation of their organizations. To avoid this problem, simply contribute to different retirement savings accounts and choose several sources of income later in life.
Contributing too little to retirement
One of the most obvious problems is not saving enough for retirement. However, it’s always worth remembering to watch how much you’re contributing in retirement. To maximize the amount of money you have in retirement, it is essential to save the right amount.
For example, starting with an initial investment of $5,000, a monthly contribution of $200 and an interest rate of 3% will yield $126,317.31 after 30 years (compounded annually). On the other hand, investing $10,000 initially and contributing $300 each month over the same period with the same interest will yield $195,544.12.
As you can see, investing just $100 more each month for retirement makes a huge difference in the long run. Consider consulting a retirement calculator to see how much you could save for your retirement.
start too late
Besides contributing too little, another major problem is starting too late. I can personally vouch for this problem myself. In my twenties, I struggled to keep a job and save my money. Now that I’m older, I can only wish I had started saving earlier. Fortunately, many Millennials are saving money earlier than other generations.
By educating yourself and saving today instead of tomorrow, you are preparing to be financially secure until later in life. Earlier, I went through a few examples detailing how saving more can yield greater benefits in the future. But what if you saved longer (ie, started saving earlier)? If you had initially invested $10,000, contributed $300 each month, and only had an interest rate of 3% over 40 years, you would have $304,064.91 at retirement. That’s an increase of over $100,000! Not bad!
Ultimately, it’s about contributing as much as you can and getting started as soon as you can.
Overestimating the amount you will receive at retirement
In retirement, your income is generally made up of two or three parts. The first part is social security, the second is a pension (if you have one) and the last part is your savings. Social Security is automatically deducted from your salary each time you are paid. The sooner you can start claiming Social Security is 62 years old. However, choosing to retire before full retirement age will reduce your benefit by 30%.
Pensions are less common today, but are usually a type of employer-sponsored benefit. Finally, there is personal savings, made up of the money you have saved throughout your working years.
Ultimately, these separate sources all make up your income after you retire. It is important to understand how much you will receive from each of these sources to accurately estimate the amount you will receive.
According to a survey, more than half of Americans haven’t saved enough for retirement. If you fall into this group, take a step back and take a hard look at your retirement planning strategies. Reviewing your plan and taking corrective action now will give you a head start when it comes time to stop working. Control your expenses, start saving more and diversify your assets. It’s the only way to enjoy a comfortable life after you retire.
Article by Kiara Taylor, Due
About the Author
Kiara Taylor is a financial writer and research analyst. She is an expert in risk-based modeling and has worked in the vertical finance industry for the past twenty years. She holds a Masters in Finance from Ohio State and has worked at Fifth Third Bank, JP Morgan and Citi in emerging markets and equity research.