If you’re planning to retire soon, the financial choices you make now can greatly impact your ability to stop working. If you make financial mistakes now, you may be forced to continue working or live on a tight budget when you retire.
By reviewing these five common retirement mistakes, you’ll ensure you avoid them so you can continue on with your current retirement plan without a hitch. This list also provides insight on how to avoid making these crucial mistakes so you can retire comfortably and on time.
Table of Contents
- 1 1. Not Setting Retirement Goals and Standards
- 2 2. No Retirement Investment Strategy
- 3 3. Not Maximizing Retirement Income
- 4 4. Carrying Too Much Debt Into Retirement
- 5 5. Neglecting to Plan for Healthcare and Long-Term Care Costs
1. Not Setting Retirement Goals and Standards
According to a 2019 Northwestern Mutual study, 56% of Americans don’t know how much money they need to retire. If these Americans don’t know how much they need to save to retire comfortably, chances are they also don’t have a retirement plan in place or a retirement date set.
The same study found that 46% of working adults expect they’ll need to continue working past the age of 65. A solid retirement plan and incremental retirement savings goals are what help ensure you’ll move into retirement at a realistic age.
If you don’t set achievable retirement goals and follow through with strict retirement savings plans, you’ll continuously push your retirement age later. It’s also more likely that when you do retire, you won’t be able to live comfortably without finding a job for supplemental retirement income.
How to Create a Retirement Plan
An effective retirement plan is one that begins as soon as possible. The earlier you are in life when you begin saving for retirement, the sooner you can retire. To create a retirement plan that works for you, follow these steps:
- Choose the age at which you want to retire.
- Calculate a monthly retirement income you feel comfortable with.
- Create a strict budget that includes contributions to retirement savings.
- Utilize all retirement options you can, such as an employer-sponsored 401(k).
When you have retirement goals in place and you know the contributions you need to make each month to achieve them, you’ll maintain motivation to stay on track with your plan.
2. No Retirement Investment Strategy
Setting aside money for retirement may not be a good enough plan to get you there. You need to develop a diversified retirement investment strategy that has your money efficiently working for you throughout the years. When you create a strategy that includes a variety of investments, it’s more likely you’ll be able to retire at the age you choose and live comfortably throughout your retirement years.
For example, say you only invested your retirement money in the stock market. You want to retire when you turn 62 but the stock market isn’t doing well. You may be forced to postpone your retirement or live on a strict retirement budget until the stock market improves. If you had a diversified investment strategy, you could pull money from other vehicles to retire comfortably while the stock market recovers.
To diversify your retirement investment strategy, consider investing in different retirement vehicles. You can use a health savings account (HSA) to assist with medical expenses, an individual retirement account (IRA) to help your money grow, or annuities to hold your retirement contributions. If your employer offers a 401(k) retirement savings account with matching contributions, use it to help you get to retirement faster.
3. Not Maximizing Retirement Income
Your way of life in retirement is also an important consideration. When you develop an investment strategy and set specific retirement goals, be sure these goals line up with your standard of living. If you expect to engage in expensive recreational activities or travel frequently when you’re retired, consider the type of monthly budget you’ll need.
Many workers make the mistake of assuming they can live on a tight budget in retirement, only to find themselves looking for jobs that cater to senior citizens. If you don’t plan to earn a supplemental income by obtaining a job in your retirement years, it’s important to maximize your retirement income as much as possible.
Considerations When Maximizing Retirement Income
There are many strategies you can implement to ensure you’re maximizing your retirement income. Depending on your situation, consider the following:
- Working for longer before you retire: If you’re not in a hurry to retire, continue working and push back your retirement age. Your retirement investments have more time to grow and you may be able to live more comfortably in retirement.
- Delaying your Social Security benefits: You may be counting on your Social Security benefits as part of your retirement income. However, if you delay retrieving these benefits, your monthly checks will be larger, so you’ll have a higher fixed income.
- Hedging against inflation: Be sure your investment strategy includes investments that are expected to maintain or increase their value. When you make inflation hedges part of your strategy, these investments are immune to the decreased purchasing power that currency can experience due to inflation.
- Consider a reverse mortgage: When you apply for a reverse mortgage, you pull out the equity in your home as cash. You aren’t required to pay the money back until you move out of your home to a long-term care senior facility or pass away. However, your heirs are responsible for paying off your debts in order to keep your home.
- Move to an inexpensive region or eliminate expenses: If you live in an area that has high taxes or a high cost of living, consider moving to a more inexpensive region. You may also downsize your home or get rid of your car, boat, or other expense so you can live more comfortably on a fixed income in retirement.
4. Carrying Too Much Debt Into Retirement
Even if you’ve done your part and contributed to your retirement investments diligently, you may not be able to retire on time if you have debt. Excessive debt should be paid off before you head into retirement or it may continue to grow and make it impossible for you to continue living on a fixed income.
For example, say you’re determined to retire at 55 and you’ve been religiously contributing to your retirement savings accounts to do so. Although you have $2,000 in credit card debt, you still retire according to plan. Since you’re on a strict budget that utilizes all your fixed retirement income, you find yourself paying only the minimum balance on your debt.
With a high interest rate, this debt begins to grow until you have an unmanageable credit card balance. Your only choice is to find another source of supplemental income so you can pay off your debts and still live on your fixed income.
Strategies to Pay Off Debt
As you approach your retirement age, analyze your debts and develop aggressive strategies to pay them down. Continue contributing to your retirement savings plan, but address your debts by:
- Identifying your debts with higher interest rates and paying them off first.
- Creating a budget that includes paying off your debts.
- Paying more than the minimum balance on all debts.
- Considering balance transfers for a lower interest rate.
- Looking into debt consolidation options for a more realistic pay-off plan.
5. Neglecting to Plan for Healthcare and Long-Term Care Costs
As you age, you may require additional medical treatments, so your healthcare costs may increase. It’s also important to consider long-term care costs you may be responsible for if you can no longer care for yourself.
The average health insurance premium for a single person in 2019 was $7,188 per year. Your premium doesn’t include deductibles and other out-of-pocket costs you may be responsible for when you seek treatment. The average cost for long-term care in a nursing home with a private room is $7,698 per month. With the high costs of health and long-term care, it’s important to include these expenses in your retirement plan.
Open a Health Savings Account
When you contribute to an HSA, your contributions are pre-tax. You can use the money in your account for qualified healthcare expenses without worrying about taxes. An HSA is a vital way to budget and pay for your healthcare costs each year.
Developing a Care Plan
While you may feel healthy now, as you age, it’s possible to face health issues that require ongoing treatment. You won’t know the healthcare costs you’ll face in retirement age, so it’s important to develop a care plan now.
Put together a reliable care team that includes medical providers, long-term care facilities, and lawyers. Identify the medical and legal needs you may have in retirement age and ensure you know how to address them before they become issues. Once you’ve developed a care plan, be ready to implement it in your older age both physically and financially.
By avoiding these common retirement planning mistakes, you may find it easier to retire comfortably at a desirable age. Ensuring you’re financially, legally, and medically ready for retirement allows you to enjoy your retirement years without stress.
Image Source: https://depositphotos.com/
Want a FREE Credit Evaluation from Credit Saint?
A $19.95 Value, FREE!