What does retirement mean to you? It’s important to ask this question because if we don’t know what it really means to us, we won’t know how to plan for it. We would like to think that retirement just means retirement…but it’s so much more than that. For one person retirement can be relaxing on the beach with a book in your hand and your feet in the sand. For others it could be leaving your full time job for a part time consulting job, or even a hobby that you’ve picked up over the years and want to start pursuing more for a little income.
No matter what retirement looks like to you, if you do it right, you only get one shot at it. If you don’t do it right, you may have to go back to work, but it may not be the kind of work that you enjoy. So here are a list of unfortunately common mistakes that people make in preparing for retirement.
Mistake #1 Not having a plan
It seems simple enough that retirement planning requires planning, but too often we find that people have gone through life collecting financial products from different financial salesmen and rarely do they have anyone go through all the different investments, insurances, and everything else that they own, in an effort to have it all work together.
This lack of planning unfortunately can hurt both the growth of your nest egg and how you take money out of it. It’s almost like we’ve walked down different aisles of the grocery store and we’ve picked up canned black olives, marshmallows, siracha sauce, and baking soda and now we’re hoping that it all turns into a decent meal.
What we should have done was go in with a plan to get a beef tenderloin, mushrooms, prosciutto and puff pastry with the goal of making a beef wellington that even Gordon Ramsay would be proud of.
Mistake #2 Mismanaging Social Security
When should you start taking social security benefits? It can seem nearly impossible to figure out when would be the best time, and if we’re being honest, even the absolute best calculations require that things go according to plan and we all know that doesn’t always happen.
We also see people rely too heavily on social security. It’s easy to think that something that you have paid into for over 40 years would build up a sizeable benefit, but many people may be disappointed with what their benefit actually is. The average monthly Social Security benefit as of July 2024 is said to be $1,782.74. Yes, hopefully you have fewer debts and fewer bills in retirement, but groceries, electricity, and transportation alone can eat away a lot of that income.
Mistake #3 Ignoring Inflation
Inflation has been a popular topic recently with it hitting the high single digits for the first time in over 40 years, but it’s still something that many people don’t factor in enough. It’s easy to feel the toll that inflation takes when your grocery bill changes so much in a few short months, but even the expected 2-4% can cause issues if not taken into consideration.
In 2000, if you retired and started taking $60,000 out of your retirement accounts for income, you’d likely need to be taking $90,000 by 2020 in order to maintain the same standard of living. That’s a 50% increase in only 20 years…at what most people would consider “average” inflation rates. If this not planned for properly that additional money needed could dry up your retirement fund pretty quickly.
Mistake #4 Not Accounting for Taxes in Retirement
Retirement accounts have done amazing work in helping people be better prepared for surviving after they leave the workforce, but many (if not most) people have a large majority of their retirement savings in accounts that have not been taxed yet.
There is nothing inherently wrong with doing this, and in fact it usually lowers taxes year to year while working, but that means that also means that taxes probably need to be paid. You could be building an “RMD monster” that you’ll have to dismantle down the road.
The Required Minimum Distributions (RMDs) could cause significant tax burdens even if you’ve done a great job preparing for retirement and don’t actually need the income. IF people account for taxes, they usually try to lower the current year’s tax bill rather than their lifetime tax bill. These are two very different financial concepts that need to have the right kind of planning.
Mistake #5 Underestimating Healthcare Costs
It’s no surprise that as we get older, the cost of our “bodily upkeep” tends to go up. We may be put on different medications, have surgeries, replacements, and all kind of other expenses that aren’t prevalent for us today. Many people assume that Medicare will cover all of their healthcare needs, but it’s likely that is not the case.
Owning the proper types of insurances, either Medicare Supplement, Long Term Care, or other types of insurance is vital to help keep the unexpected medical expenses from taking a big chunk out of your savings.
Mistake #6 Neglecting Estate Planning
Unfortunately many people do not consider estate planning to be a necessity, many times leaving family members with a nightmare of a tangled web to try to unwind. Loved ones are not able to make decisions with confidence about where money should go, and many times money, properties, and other assets can get caught up in the court system resulting in potentially years of waiting around before everything can be finalized.
Having a proper estate plan no matter your age is very important to consider especially as we age and our children become more and more busy. Your passing will likely be hard enough on them, having an estate plan could keep that process from being harder than it has to be.
Mistake #7 Not Considering Nickels Wealth
Obviously, we’re a little bit biased with this one, but working with the right financial planner could be a night and day difference in your retirement. Chances are you’ve lived your life working hard at a job that you’re extremely proud of, but that’s kept you from looking into your finances like you might have wanted to.
If you feel like you’re not prepared and don’t have the information you need to plan your retirement the right way, we highly suggest reaching out to someone that will look at your entire financial life. There are many professionals that may want to look only at insurance, or investments, but we recommend someone that is interested in the big picture.
If you need help finding that “right” financial planner for you, reach out to us. If we’re not the place for you, we’ll help you find somewhere that is.
Life doesn’t wait.
Neither should you.
