4/22/2013 9:45 PM ET|
Retirement miscalculations to avoid
Your quality of life in retirement will be determined by actions you take long before you stop working. Here are 3 key missteps to avoid.
Effective retirement planning starts with making the right assumptions. If we hope to be on the mark when we retire, we need to make accurate estimations about important retirement variables, including how long we will live and how much we need to save. Once we have reasonable estimates for these, we can take the appropriate action to help ensure we will be ready for retirement. If we do not plan ahead or if we make erroneous assumptions, the quality of the retirement life we hope to live can be in jeopardy.
Sometimes despite our best efforts we make mistakes in our calculations for retirement, and we are forced to live with the consequences. But we can greatly help our cause if we are careful to avoid these glaring retirement miscalculations:
1. Underestimating the length of retirement. Average life spans continue to increase, with American males adding almost two years each decade and females living about 1.5 years longer per decade. If you are a 65-year-old U.S. male, you now have a 40 percent chance of living to 85. Females have even better odds, with a 50 percent chance of getting to 85. We all want to live long, productive and inspiring lives for as long as we can. But if our plans for retirement do not take into account the likely increase in longevity, we could find ourselves out of resources with more time still ahead.
To prepare for the possibility of an extended retirement, we need to make financial calculations based on a longer time frame to insure there will always be funds available. If you are able to delay claiming your Social Security payments, you can increase the monthly amount you will receive later on in life. Try to view Social Security as an insurance program that will protect you in extreme old age. If you retire too soon you will get smaller Social Security checks every month, and you will be drawing from your retirement savings over a longer period of time. It may sound good to get out of a stressful work situation as soon as you can, but be careful to weigh the full impact of early retirement on your long-term lifestyle.
2. Living beyond your means. After decades of working, everyone deserves a few expensive meals and extravagant travel adventures. Some people may be fortunate enough to spend freely in retirement, but most will not. The people who spend extravagantly during the early days of retirement could find themselves in dire financial straits as their retirement years continue to roll on. Living with a “why wait when tomorrow may never come” attitude is a mistake, unless you actually have unlimited funds.
A better motto for most of us is to live beneath our means. Rather than spend money like it is burning a hole in our pockets, spend less and savor the positive balance in your bank account at the end of the day. Calculate what your expenses are, and live within a reasonable budget. By living a more moderate lifestyle that is within or beneath your financial means, your savings will stretch much farther and you will reduce the risk of outliving your savings.
3. Following investment advice that isn't right for you. The financial market is a challenging arena, even for experts who dedicate their lives to it. Having accurate information is no guarantee you will put your money in the right place at the right time. And investment advice that is good for one person may be entirely inappropriate for the next. The best investment vehicle depends on your individual situation and requirements, the level of risk you can comfortably assume, the purpose of the investment, the amount of money you are considering investing, and the number of years you have for the investment to grow. And sitting safely on the sidelines is not a good option either, because inflation can eat up your purchasing power.
If you are not a financial guru or interested in becoming one, a good way to go is to work with a qualified financial planner who has your best interests at heart. You can start with recommendations from family and friends. Make sure your adviser understands everything about your specific situation and goals. A red flag is someone pushing a specific investment vehicle before truly understanding your goals. Good financial planners understand the relationship between fees and performance and will do everything in their power to keep them as low as possible without sacrificing returns. Some good advice from a reputable adviser can go a long way toward helping you make better investment decisions.
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Always keep in mind that we are on our own in this retirement battle. The Government is not interested in helping us as much as they are interested in protecting themselves.
Save as much money as you can in a Roth IRA or Roth 401k. Then be prepared to quietly take the money out and hide it in your mattress when the government decides to change policy and start taxing the Roth Accounts.
Put it where Obama and congress cant spread it to those who do not work!
There are many different ways to look at life and savings. We are in our early 60's and since the 70's we have lived modestly. We do like to spend money so we had to give up other things. We didn't give up investing in our retirement and I started a 401 at work in the early 80s. My husband worked in one industry for most years and had vested pensions. But, we decided to not live beyond what one income could support, which was the best idea because in the 90's so many jobs went overseas. Hubby would lose his job either by shop closings or lay-offs/strikes, and so my income and his unemployment wages got us through those times, but we would not have been able to do it if we had had an expensive house, cars, vacations, etc. that needed two incomes. Our sacrifices were never buying new cars, only buying homes that one income could support, sometimes buying used furniture and appliances, going on less expensive trips (camping or staying with friends whenever possible), paying off loans as fast as possible, putting as much money into the 401 as possible, thus less weekly spending money, etc. We did want hobby/sport supplies and equipment, books, bird seed for out back, clothes, bikes, exercise equipment, pets, shoes/boots, camping gear, and countless other needs to enjoy life, but decided we were not going to buy high-end or top-shelf, and buy good-used whenever possible. So we had money to pay medical bills, repair our cars and trucks (4 at last count), our 3 boats, house remodels and repairs, pet bills, and every other up and down that came along. We were even able to loan money to friends in need.
We had a few meetings with a financial adviser and found out that we will have more money to live on at retirement than we do now, which is a huge shock, what with the market crashes every few years. But we never pulled out of the market, and sometimes we lost the interest made, but never lost the money we put into it, so it was a savings after all. Putting all that money into the 401 and pensions has made life difficult at times (who wants to repair an old vehicle or give up weekly carryouts?), but now we are very glad we did. And yes, driving an old vehicle sucks, but we enjoy life, have lots of hobbies and many vacation memories and we didn’t have to pass up a 2 month vacation to western Mexico for our 25th anniversary.
If you want advice, save for retirement one way or another, live frugally so when you get in a bind you won’t lose your house, and decide what you really need and want and make that your priority. Unless you are rich, you will not be able to have everything, so pick and choose. Perhaps driving used cars is too much of a sacrifice, then buy new vehicles and sacrifice other ways.
I control my own investments which has made me a modest nest egg. I have worked over 30 years for what I have and refuse to give some of it to any financial expert or invest in the stock market, which will only make other people richer. Thank you but I will keep my own money. I recently retired and plan to continue living on a modest income. I agree that articles like this are not helpful but then I guess writers have to make a living.
Retirement planning is really a comical process. Your salesman / advisor tells you that inflation is a real concern. The salesman's solution to this problem is to allocate a large portion of your hard earned money to one of the most volatile asset classes available. With a straight face he insists that losing 50% of your value every 3 year or so in the stock market is a perfectly normal, rational thing to do . You now are reminded why Warren Buffet referred to Wall Street as a casino.
Is this the best the financial services crowd has to offer? Yes folks, that's all they've got, unless you are interested in signing a 40 page annuity contract. That's their business model.....take it or leave it. They don't have anything else to offer you.
When someone mixes conflicting terms such as "accurate estimates" you know you are being asked to ignore common sense.
I thought Social Security was a safe bet and the government could be trusted.
Investing in the market is the only way to retire comfortably. Learn the craft, the difference between earning and gambling is knowledge.
Investopedia allows you to set up a fake account so you can practice without risking a dime. Use it years before you can afford to invest so you can do it like a pro when the time comes. Best part is it's free!
Start as early as possible and take full advantage or 401K's, etc. As soon as you can, get out of managed funds and run your own portfolio.
Another option is bonds. Buy bonds and at the end of 10, 15, or 20 years you cash them in (at maturity) and get every penny back. And in the meantime you get cash every year from a guaranteed interest rate that was established at the time you bought the bonds. If the bonds lose money, you will still get what you paid for them when you cash them in at maturity and you will still get the guaranteed interest rate in cash each year till maturity. If they go up in price you can sell them. But don't sell them if they go down in price, that's why they are a long term investment option. When bonds go down in price that is a good time to buy more of them.
Example: My dad bought GE bonds with a 15 yr maturity for 4.05% interest gained each year. He gets about $2100 in cash from that interest each year. Its not a whole lot but it pays his house taxes. In 2023, at maturity, he will cash them in and get all his money back that he originally paid for the bonds. In the meantime, when the bonds lose money and go down in price, he will buy more of them.
Do not believe that you can live on 70% or 80% of your pre-retirement income. There are so many unforeseen expenses. We always thought our children would be near by. Their jobs have taken them to other states which results in plane fares to visit them, and paid help for things they used to help with. Also, our youngest adult child has had health issues and unemployment problems which has resulted in our helping financially. The very elderly parents might soon need help as they have outlived their
life savings. You can still be in the "sandwich generation" in your 60's and 70's, especially with the
economic difficulties the young people are experiencing in getting started in their lives. Inflation has taken its toll as well, since pension reductions have taken place simultaneously.
For the majority of workers your fate is sealed. Your lifetime income was meager and you were not able to save enough to provide an inflation indexed retirement income. You will be dependent on the government to provide you your Social Security / SSDI & Medicare.
You will be required to delay retirement and stay at work longer (if you can find employment) and your standard of living will continue to decline as your health deteriorates.
Your plight is desparate and your future is bleak.
On the bright side, you will live long enough to be destitute. Gee, maybe not so bright afterall.
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