8 costly retirement planning mistakes
Most Americans worry that they won't have enough money for a comfortable retirement. But if you avoid some major missteps now, you're more likely to find yourself among the unworried later on.
This post comes from Angela Colley at partner site Money Talks News.
In a recent survey, only 13% of respondents told the Employee Benefit Research Institute they’re very confident they’ll be able to afford a comfortable retirement. Meaning, 87% of respondents weren’t sure they’ll be able to continue their quality of life after leaving the workforce.
Those are scary numbers, but you can eliminate much of the worry by avoiding the common retirement planning mistakes people make. In the video below, Money Talks News founder Stacy Johnson explains how you can do that. Check it out, then read on for advice.
1. Failing to plan
In another section of the survey, only 23% of respondents told the Employee Benefit Research Institute they were very confident they’re doing a good job of financially preparing for retirement. Failing to plan is one of the biggest mistakes you can make. If you don’t have a plan, spend a weekend hashing one out. Here are some questions to ask yourself:
- What do I want to do in retirement? Should I save for travel or hobbies?
- How much will I need to cover my expenses?
- How much do I have saved now?
- What is my goal amount?
- How much will I need to reach my goal?
- How much should I put aside a month to get there?
I started saving for my retirement at 18 because my parents persuaded me to sign up for my company’s 401k plan. At the time, it was just a few bucks a month, but that seed money has had time to grow. If I’d started now, I would have missed out on 11 years of compound interest.
Bottom line: The sooner you start saving, the bigger your pot of money will be when you’re ready to quit work.
3. Not taking advantage of 401k’s
If your company offers a 401k plan and you’re not contributing, you’re making a huge mistake. Contributions to your 401k come out of your paycheck before taxes, meaning it’s a portion of your income that you won’t pay taxes on now. And many employers have a match program, meaning they’ll match your contributions up to a certain percentage, which is free money.
Talk to your human resources office about your company’s 401k plan and sign up ASAP.
4. Not understanding the risks
Stocks come with risks, but if that’s causing you to shy away from stocks entirely, you’re depriving your retirement account of an opportunity to grow. On the flip side, you could be taking on too much risk. If you have an aggressive retirement plan loaded with high-risk stocks, you might end up losing a big chunk right before you retire.
Stacy, in a post for beginning stock investors, offers this advice:
I suggest subtracting your age from 100, and putting no more than the resulting percentage of your long-term savings into stocks. So if you’re 25, 100 minus 25 equals 75 percent in stocks. If you’re 75, you’d only use stocks for 25 percent of your savings.
5. Relying on Social Security
But as I also said, that’s just a rule of thumb. If you’re nervous, you’ve invested too much.
If you’re relying on Social Security to keep you solvent in your golden years, you might be setting yourself up for disaster. Use the Social Security Administration’s Retirement Estimator to see an estimate of your Social Security benefits.
Odds are, it won’t be enough. The maximum Social Security benefit this year for someone who retires at full retirement age is $2,533 per month and only $1,923 if you take early retirement at age 62.
6. Underestimating health care costs
If you assume your health care costs will be covered after you qualify for Medicare at age 65, you might be in for a rude awakening when you retire. Fidelity Investments says a couple retiring in 2013 will need $220,000 on average to cover health care costs in retirement. That’s not including nursing home or other types of long-term care.
Fidelity adds that “retirees now spend more on health care than they do on food.”
7. Borrowing from your future
You can borrow from your 401k, but that doesn’t mean you should. I worked for a company that actually encouraged people to borrow from their 401k’s to cover expenses like a new house or car. You will have to pay it back, but in the meantime your retirement funds won’t be growing as much as they otherwise would if you had left that money in the account.
8. Cashing out early
If you quit your job, you may be tempted to cash out your 401k, but do so and you’ll not only owe taxes on the amount but you’ll also face a 10% penalty. If you cash out your 401k before your retirement, you’ll have to pay taxes on any money you collect. Instead, roll your 401k into an individual retirement account and stay tax-free.
More from Money Talks News:
- 13 ways to get more Social Security
- 6 ways to invest a few minutes and make major money
- Why women are more likely to retire poor than men
Sorry people but when we retired 17 years ago there is NO WAY to estimate that our HEALTH CARE PREMIUMS for two of us would be close to $10,000 a year. Of course if we hadn't worked all our life this would be provided.....pretty sick when you think of it.
What is really sickening is seeing our neighbors living high on the hog with so called "disability" payments and she claims she gets Medicare for free.
As I see it these "Disability recipient's" can do most anything except WORK.....and I'm sorry to say this more of the normal than exception in my area of the country.]
Spend less than you earn. Live within your means. Credit cards are a 30 day account. Don't blame the government for being stupid. Take responsibility for how you spent your earnings. Be persistent in preparing for retirement. Social Security might pay a few bills, it is not what you will need to live on. Love your spouse, love your family, that is all you have. I am 70 and life is good.
Yes! I like this program it helps directs me to right decision makes on my retirement plan,
I still don't think of retires yet,as I have things to clears from payments of debts,then I'll do
my maths and do some researches first before I think of retires.
But this is a great program for me to follow up for the future savings,,,Thanks
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
ABOUT SMART SPENDING
LATEST BLOG POSTS
The Consumer Financial Protection Bureau's complaint database highlights the worst problems people have with collectors.
VIDEO ON MSN MONEY
BLOGS WE LIKE
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'