From overspending to ignoring our debt, a recent survey found we are making an average of eight financial fails or bad decisions with our money each month.
Big or small, missteps with our money can harm our financial future. Here are some of the most common financial fails, and how to avoid them.
1. Failing to Save
We used to think of retirement planning like a three-legged stool. Retirees could rely on a pension from their employer, Social Security from the government and their own retirement savings. Those three legs created a nice nest egg. Now, with pensions becoming a thing of the past and the future of Social Security uncertain, it’s more important than ever that we control what we can — and that’s our savings.
I recommend at least 10% to 15% of every paycheck goes to your retirement savings. The easiest way to make this happen consistently is by setting up automatic contributions from each paycheck to a retirement savings account. But don’t stop there. Be sure you don’t just go on autopilot. Bump up your savings rate each year or with each raise. A small increase in your contributions won’t be very noticeable from your paycheck, but it will make a big difference in your balance.
2. Failing to Plan
The majority of Americans do not have a written financial plan. It’s a lot harder to save when you don’t have a plan for your money. A financial plan, written in conjunction with a trusted financial adviser, will help keep you on track.
Your plan needs to look at your entire financial picture, both now and in retirement. And it needs to touch upon these core areas:
- Income Needs: When planning for retirement, many people underestimate their income needs. The average person will need to replace 80% to 90% of their pre-retirement income. If you want to look at your income needs more in depth, you can divide your retirement into three phases. 1) During early retirement, your spending will likely be higher. Retirees at this stage are travelling a lot and actively enjoying their free time. Depending on health, this phase is usually ages 55 to 75. 2) Then, spending slows down a bit in the second phase of retirement. Due to health or age, you will likely stay home more and travel less. This phase usually spans the 70 to 85 age range. 3) In your third phase of retirement, health care will likely be your biggest expense, and your spending might increase a bit from the second phase. This is generally true for those 80 and older.
- Taxes: It’s important to consider your tax bracket both now and in retirement. If you have your nest egg saved in tax-deferred accounts like a traditional 401(k) or a traditional IRA, that money is not all yours. When you withdraw money from those accounts in retirement, Uncle Sam is looking to collect. Factor your tax liabilities into your retirement plan.
- Withdrawals: Between your employer-sponsored retirement account, Social Security and your personal retirement savings accounts, you will need a strategy for how much and from where you will withdraw money in retirement. If you have a mix of tax-deferred and tax-free accounts, you will want to strategize your withdrawals. Remember, you are required to withdraw money from your tax-deferred retirement accounts once you reach age 70½; this is called a required minimum distribution, or RMD. Talk with your financial adviser to find a withdrawal strategy that works best for you.
3. Failing to Deal with Debt
Too many people are failing to deal with their debt. Older Americans are carrying more debt at higher levels, and more than one-quarter of baby boomers predict they'll never pay off their debt! We encourage our clients to enter retirement debt-free. That means you need to get serious about paying off debt during your working years; there is more flexibility when you have a paycheck coming in on a regular basis. Once you’re in retirement, your budget is fixed and any debt payments you have need to fit within that budget. If they don’t, you will have to cut back on your lifestyle or you run the risk of running out of money.
4. Failing to Educate Yourself
More than half of baby boomers admit to knowing very little about Social Security benefits, and more than 80% haven’t even tried to guess how much health care will cost them in retirement. There is a lot to learn as you plan for retirement. Take an active role in getting educated. At Drake & Associates, we believe in education first. In order to make the best financial decisions, you need to truly understand your options. As we create financial plans, we make sure to explain every step so our clients feel confident in their financial future.
The bottom line: Recognizing our shortcomings and committing to making a change is the first step to improving our financial situation. When it comes to planning for retirement, our spending and saving habits need to be top priorities.
Tony Drake is a CERTIFIED FINANCIAL PLANNER™and the founder and CEO of Drake & Associates in Waukesha, Wis. Tony is an Investment Adviser Representative and has helped clients prepare for retirement for more than a decade. He hosts The Retirement Ready Radio Show on WTMJ Radio each week and is featured regularly on TV stations in Milwaukee. Tony is passionate about building strong relationships with his clients so he can help them build a strong plan for their retirement.
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