The financial turmoil of the past eight years or so has made many Americans uncertain of how viable their retirement accounts actually are. Planning for retirement is difficult at the best of times since you are trying to save up money to sustain yourself for an unknown number of years with unknown expenses, and it isn’t made easier by the fact that some people are inadvertently making the task harder on themselves. There are several common mistakes people make when planning for retirement. Learning about them now can help you avoid doing the same in the future or let you recognize ones you are actively committing and changing your actions accordingly.
Mistake #1: Operating on Inaccurate Assumptions
It is easy to make mistaken assumptions about how much income you need in order to maintain your current lifestyle upon retirement. This can be detrimental regardless of whether you are overestimating or underestimating the amounts in question. If your income estimate is too high, then you can end up subjecting yourself to unnecessary stress trying to build savings up to that point or, worse, may believe that retirement is impossible and not try at all. If your estimate is too low (which is more common), then the false sense of security can come back and bite you once you begin your retirement proper.
A general rule of thumb is that you will need a minimum of 80% of your current income to sustain your present lifestyle upon retirement. The exact income you will need can become clearer as the time approaches, when you can get a clearer picture of expected social security benefits, housing costs, medical care, etc.
Mistake #2: Underestimate the Cost of Medical Care or Long-Term Care
Healthcare can be expensive and Medicare does not cover everything. Failing to account for the healthcare costs you might incur during retirement can lead to an unpleasant sticker shock as your seemingly carefully planned retirement funds get tangled up and start to drain away. This also extends to the costs of residential care or long-term care facilities, which may end up being necessary if your medical needs become complex. Obviously, it is hard to predict what kinds of care you will personally end up needing in your retirement, but there are still ways to start accounting for these sorts of situations. Statistics are readily available that show trends in retirement health care costs and it is possible to look up how much a room in a nursing home or assisted living facility can cost in your state. Keep an eye on these numbers and update your retirement estimates every year or two in order to keep your understanding up to date.
Mistake #3: Early Retirement
Social security allows early retirement starting at age 62, with the full retirement age being 67. It can be tempting to leave the workforce five years early, but it’s important to recognize that this can significantly affect your income expectations. If you begin drawing on social security at age 62, then your monthly benefit is reduced by up to 30%. If you start at age 65, then it’s reduced by 13.3% instead. Only by waiting until you reach full retirement age can you get the entire monthly benefit. In addition, those five years you’re working between age 62 and 67 will continue to earn you income and help contribute to your savings. Additionally, you can earn additional monthly benefits by delaying retirement past age 67, but whether this is feasible for you or not will depend on individual circumstances.
Mistake #4: Not Diversifying
Investments and stocks are common ways to build money for retirement, but doing so can be overly risky without a diverse portfolio. Ideally, no more than five percent to 10% of your portfolio (retirement account or otherwise) should be of any one particular stock. This keeps your risk lower and will protect you should anything in the company go awry or if market volatility takes an unpleasant turn. You should also evaluate the amount of risk your investments may be exposed to and how this can affect your savings plans. Generally speaking, the closer you are to retirement, the less advisable it is to use high risk investments since you won’t have as much time to rebalance if something adverse happens.
Mistake #5: Too Many Fees
The 401(k) retirement plans can be subject to a surprisingly large number of fees and not all of these are covered by employers. As the fees compound over time, they can eat up to a third of your retirement savings if not curbed early. Fortunately, plan sponsors are required to disclose the fees you are being charged. Get this information and use it to see if you need to make changes to your plan and, if necessary, move it somewhere else entirely.
Use LUSO Federal Credit Union for Your Retirement Planning Needs
LUSO Federal Credit Union is a not-for-profit, member-owned financial cooperative dedicated to providing members with quality financial services and products. We at LUSO pride ourselves on serving the financial needs of our members and helping them build successful retirement savings plans. Our services are available in Ludlow, Springfield, Chicopee, Westfield, and Hampden County, Massachusetts.
Feel free to contact our Ludlow branch toll free at 1-844-LUSO-FCU or our Wilbraham branch at 1-800-808-5876.
LUSO Federal Credit Union and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.