Mistakes That Ruin Retirement
Despite all the charts and graphs, retirement planning isn’t a precise calculation. Knowing how much money you will need requires estimating such things as when you’ll retire, how long you’ll live in retirement and how much you’ll spend – all of which are factors that can vary widely. Some of the biggest – and most common – mistakes in retirement planning stem from the assumptions people use.
Misjudging the Timing
About half of Americans retire before their planned retirement age, according to Time Magazine, and for a range of reasons including job loss or illness. Retiring early increases the risk that you will outlive your retirement savings, since not only do you have less time in which to save, but you also must finance a longer retirement. Compounding this is the fact that people commonly underestimate their life expectancy in retirement.
You may be setting the retirement clock for a 20-year retirement, but consider what will happens if you live 30 years or more after retiring. At the other end of the spectrum, people who haven’t saved much for retirement may plan to work longer than is realistic. You may want to work into your 70s, but you don’t know whether you’ll be capable of working and whether someone will employ you.
Underestimating Your Spending
It’s common for people to predict that they’ll spend less in retirement than they do while they’re working. But the reality is often just the opposite. As you start to transition from working to retirement, you may no longer have work expenses, but you’ve got long days to fill – with shopping, travel, hobbies and other activities that can cost money. Underestimate how much money you’ll actually spend in retirement and you could find yourself burning through your savings much faster than you expected.
Neglecting Effects of Inflation
Say you’ve determined that the lifestyle you want in retirement would require about $30,000 a year, so you calculate your retirement planning so that you’ll have that much to spend each year for 30 years. The problem is that you haven’t taken inflation into account. Even if inflation is a relatively modest 2 percent a year, the buying power of that $30,000 will gradually decrease to about $16,600 over the 30 years. If inflation is 3 percent, closer to its long-term average, your buying power in year 30 is only about $12,400. Failing to account for inflation can significantly reduce how long your retirement savings will last.
Failing to Account for Emergencies
Emergencies don’t stop occurring just because you’ve stopped working. Maybe your furnace dies, or your car quits working. Maybe you have high medical bills, or find yourself having to care for aged parents. A retirement plan that doesn’t at least take emergencies and unexpected extras into consideration could unravel when such needs arise.
Building a cushion within your nest egg can provide some protection. So can staying on top of your credit situation. Reduce balances on credit card accounts, if necessary, so that you have credit available if you need it. Check your credit report regularly to make sure there are no problems – and fix any that you find.
About the Author
Cam Merritt has been a professional writer and editor since 1992, specializing in articles about personal finance and law. He has contributed to USA Today and the Better Homes and Gardens family of magazines and websites. Merritt has a Bachelor of Arts in journalism from Drake University.