Financial Fails in Retirement Planning
We all make mistakes, but some are more common (and more costly) than others.
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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
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.
-
Your Venice Day Trip Is Now Slightly More Expensive
People visiting Venice for a day will pay a fee for a limited time as part of pilot program.
By Alexandra Svokos Published
-
Stock Market Today: Markets Tumble Amid Slower Economic Growth and Rising Prices
Disappointing readings on GDP and inflation helped tank equities.
By Dan Burrows Published
-
Is Your Retirement Solution Hiding in Plain Sight?
Here’s how to use your home equity in combination with an annuity contract to produce late-in-life income.
By Jerry Golden, Investment Adviser Representative Published
-
How to Choose Your Trustee or Executor of Your Will
Above all, you should choose someone you trust, keeping in mind that acting as a trustee or executor can be a complex, thankless and sometimes long-term job.
By John M. Goralka Published
-
Pros and Cons of Waiting Until 70 to Claim Social Security
Waiting until 70 to file for Social Security benefits comes with a higher check, but there could be financial consequences to consider for you and your family.
By Patrick M. Simasko, J.D. Published
-
How to Stop Boredom From Ruining Your Happy Retirement
Retirees who explore new interests and have an active social life are more likely to find joy — and even greatness — in the newfound freedom of retirement.
By Richard P. Himmer, PhD Published
-
The Life-or-Death Answers We Owe Our Loved Ones
How our life ends isn’t always up to us, but that question too often must be answered by loved ones and health care workers who don’t know what we would want.
By Joel Theisen, RN Published
-
Is 100 the New 70?
Eating well, exercising, getting plenty of sleep and managing chronic stress can help make you a SuperAger. Funding that long life requires longevity literacy.
By Phil Wright, Certified Fund Specialist Published
-
Nine Lessons to Be Learned From the Hilton Family Trust Contest
Disclaimers, good communication, post-marital agreements and more could help avoid conflict in a family after the owners of a wealthy estate pass away.
By John M. Goralka Published
-
Strategies to Optimize Your Social Security Benefits
To maximize what you can collect, it’s crucial to know when you can file, how delaying filing affects your checks and the income limit if you’re still working.
By Jason “JB” Beckett Published