In general, Americans are pretty fearful about retirement and it’s easy to see why.
So today I want to talk about seven different things that can totally derail anyone trying to work toward more financial stability in their golden years.
Retirement Planning Sin #1: Counting on Social Security, Pensions, and Other Traditional Plans
At this point, I’ve probably written a million words on the problems with our traditional retirement systems and you’re free to read my thoughts in past articles and interviews I’ve done over the years.
But just to recap:
- Social Security is now taking in less than it pays out and is projected to do so every year going forward…
- Without changes, the program’s trust fund will be exhausted in 15 years and only 75% of promised benefits will be paid out…
- Many pension plans – both governmental and private – have been suffering from similar shortfalls and systemic problems…
- A number of pension plans are already trying to go back on the promises they’ve made to retirees…
- And while near-term retirees will probably be the least affected group, I wouldn’t treat any guarantee as sacred.
Now, it needs to be said: These are not just abstract concepts. I’m not saying these things for shock value. These are real issues that impact a lot of people in my own life.
For example, my father has two different state retirement plans after working in various mental health facilities for four decades.
My mother-in-law receives her retirement income from a pension provided by Dupont, her life-long employer.
And even I have a small pension from more than a half decade working at Standard & Poor’s.
I hope all of our payments keep coming as they should. But I’m telling my father, my mother-in-law, and everyone else not to just blindly depend on it!
Instead, you should always be saving and investing somewhere else on the side… just as a fall-back plan.
Retirement Planning Sin #2: Failing to Have a Budget
For about 15 years, I urged my mom to keep track of her spending so she would have a good understanding of what her cash flows looked like.
In response, she gave me all kinds of excuses. She didn’t have time. She already had a basic idea of what she was spending. That there was no possible way to even keep track between her credit cards, her check payments, and all the various cash transactions she was making.
Then she turned 66 and got serious about retiring.
Sure, she knew what all the big numbers looked like – property taxes, car payments, etc. But did she have any idea how much was being spent eating out with her friends? Or going overboard buying Christmas gifts for my daughter?
Not really. Without that knowledge it was going to be impossible for her to design a sustainable life on a very fixed income.
Now she’s actually retired and keeps better track of the money coming in and going out because she has to. But she could have been even better prepared… and probably saved a lot more money ahead of time… if she had started sooner.
So please, if you don’t currently have a budget… one that accounts for ALL your expenses… please get one up and running.
I do this in an excel spreadsheet for my own family and we meet at the end of every year to revisit things.
But the process can be as simple as a $1 notebook from the drug store. And all you have to do is write down how much you spent and on what – no matter what payment form you use.
Then, after a few months, add up the numbers and put them into basic categories. I think you’ll be surprised at the patterns you see… and where you might have room for additional savings.
One other thing – if you share your finances with anyone else, it’s absolutely crucial that you include them in this process and that you have open and honest discussions about how the money is getting spent.
Speaking of which, there’s one major expense you might NOT be factoring in. And that’s why the third deadly sin is
Retirement Planning Sin #3: Ignoring Inflation, Especially in Health Care Costs
I’m sure you understand the general concept of inflation and you already have a sense that today’s budget might look different ten years from now simply because of rising prices.
But perhaps no single expense is rising faster – or impacting more retirees – than soaring healthcare costs.
Every year, Fidelity takes a look at how much a typical 65-year-old couple will spend on out-of-pocket healthcare costs during retirement.
This year the number was an eye-popping $280,000.
Five years ago, the number was $220,000.
That’s a 27% surge in just half a decade!
What’s more, this is assuming you have traditional Medicare coverage. Plus it doesn’t include costs associated with nursing-home care.
And that’s where things get really scary.
Unless you’re essentially destitute and qualify for Medicaid – or you’ve already purchased long-term care insurance – medical treatment outside a hospital is going to be your cost to bear.
The total outlay depends on a number of factors, including your local area. But according to Senior Living, the national average for a semi-private nursing home runs $82,128 a year!
Look, I’m not trying to depress you here. But the reality is that 70% of us will need long-term care services at some point in our lives… and sometimes it happens sooner than we think. In fact, 40% of the Americans in long-term care are between the ages of 16 and 64.
So whether you consider long-term care insurance or you simply set aside a big chunk of money and hope for the best, you at least need to consider the huge impact that health care costs will have on your family during retirement.
You’re looking at a quarter of a million bare minimum. And another $100,000 a year if long-term care becomes necessary.
That could be enough to drain even a very well-prepared retiree.
Which is why you should also seriously explore how you can protect your income and assets before they get taken or disqualify you from Medicaid.
The rules vary from state to state, and they’re always changing, but at the bare minimum you want to start thinking about this at least five years before long-term care becomes a real possibility.
For example, if you have a second home or rental real estate, you might consider signing it over to a trustworthy heir before you end up signing it over to a nursing home.
And speaking of protecting your assets…
Retirement Planning Sin #4 Is Not Using Tax Shelters!
It doesn’t matter if you’re 30 or 60 – you should be using tax-advantaged accounts for the vast majority of your saving and investing.
Obviously, choosing which particular accounts make the most sense is going to vary based on your individual circumstances. But in general I recommend using the following process:
First, contribute enough to any employer-sponsored plan to get the maximum match…
Second, if you’re self-employed – which includes people who merely have side businesses – also consider opening a Solo 401(k) plan…
And third, use IRA accounts – traditional and/or Roth varieties depending on your goals and tax situation – to sock away even more.
This is what I do personally, and the same thing I recommend to everyone else I talk to regardless of age or income.
Retirement Planning Sin #5: Not Having “A Post-Work Plan.”
A lot of people don’t think this really matters – especially if they’re still relatively far away from retirement.
Heck, how could NOT working be hard, right? I mean, most people figure waking up without anything to do is a great problem to have.
However, I know someone who retired – from a job she didn’t even like – and she found the transition to be VERY difficult.
So much so that she had to take a class at her local senior center titled “Every Day Is a Saturday.”
In what amounted to a support group, she witnessed countless other new retirees literally breaking down because they didn’t know how to handle their newfound freedom – including a 70-year-old heart surgeon who cried profusely!
Rather than figuring this out as you go, start thinking about it now… and always keep that budget in the back of your mind, too.
There are countless resources available to retirees – free classes (even college educations in some places!)… special exercise groups… volunteer opportunities… mentoring programs… the sky is literally the limit.
The key is envisioning your future before it arrives.
And on a similar note…
Retirement Planning Sin #6 Is Being Inflexible
We never have any idea how things are going to turn out – in investing or life. So all we can do is plan for the best and prepare for the unforeseen twists and turns.
If you have a very narrow vision of what your future looks like, and you’re unwilling to change course, you’re setting yourself up for potential disappointment.
Just consider the thousands of retirees who are now discovering whole new lives in foreign countries they had never thought of visiting ten years ago!
Am I saying you should have to move to Thailand to get a comfortable retirement? Of course not. I’m simply saying that we should try to find joy no matter what… and embrace the excitement of trying new things no matter our age or circumstances.
That’s the real secret to a long, healthy, and happy life.
Which brings me to our final retirement planning sin… perhaps the biggest of them all…
Retirement Planning Sin #7: Procrastinating!
I started saving in a 401(k) the very first paycheck I got and I have increased the amount I sock away at every possible opportunity ever since then.
Two decades in, I have quite a lot in the bank already. Meanwhile, most of my friends are still treating retirement as some far-off thing.
Sure, there might be another two decades to go for anyone in my age bracket. But time flies!
That’s something to remember no matter how old you are… no matter where you’re at in terms of your goals… and no matter how much money you currently have.
To a richer life,
— Nilus Mattive
Editor, The Rich Life Roadmap