- Don’t wait until you have a financial milestone in mind to start saving or even putting a plan together.
- Plan for your retirement and the expenses you’ll have, not someone else’s idea of what retirement should be.
- Don’t retire too early. Just because you reached “retirement age” doesn’t mean you can afford it.
As a Certified Financial Planner for Personal Capital, I see too many people who focus on their present financial situation or the few years that lie just ahead. They don’t “look out” to what seems like the far horizon of retirement. Just the other day I took a car to the airport and chatted with the driver. He was probably in his 60s and happy with the money he was earning, but said nothing about his future. I imagine he’ll be driving people to the airport for the next 20 years.
In my experience, the most common mistakes that people make begin well before retirement and they all fall into 1 of 2 categories. The first is simply not having a plan or thinking “I’ll get to it later,” and the second is having a flawed plan.
The “No Plan” Plan
People often make the first kind of mistake out of fear or ignorance. I frequently hear younger clients say, “I will make a plan when I get married … have a kid … buy a house … “ etc., but it’s the people who establish a good plan early on who have the most success. You shouldn’t wait until your next life stage begins because there is always another life stage inviting you to postpone taking action until tomorrow. If people wait to begin saving and investing until their forties, they may have to save at double the annual rate of people who start investing in their twenties. As a general rule of thumb, if you save 10–12 percent of your salary between the ages of 22 and 65, you will have roughly the same ability to cover retirement expenses as an individual who saves 25 percent between 40 and 65. Establishing good habits early pays off. The excuse of “I don’t know what I’m supposed to do to plan for retirement” is just that—an excuse! Make a plan and stick to it.
Portfolio Value: Saving 10% Of Income At Age 22 vs. Saving 25% Of Income At Age 45
As the graph shows, in order to recover the savings you could have had by starting at 22, you’ll have to allocate more of your monthly income at 45 into your retirement savings accounts. For example, if you started saving at 22 you could be well into building a healthy retirement with $500,000 by age 48; however, if you waited to start until age 45, it would take you until age 53 and require significantly more of your monthly paycheck being paid into retirement accounts just to catch up.
The Imperfect Plan
The second kind of mistake arises when people have a plan, but it’s flawed. You think you’re looking ahead but you’re not looking clearly or far enough. Here are the most common investment mistakes I see and the most important ones you should avoid:
● Not investing properly – this can mean choosing the wrong asset allocation, keeping too much in cash, taking an improper amount of risk, or using expensive investment products.
● Not planning for YOUR personal situation. Generally speaking, retired people spend about 20% less than when they were working. They no longer commute, or entertain business colleagues—and their mortgage is probably paid off. However, it can work the other way. I know many retirees who spend more in retirement than when they were working. They travel more, perhaps eat out more often, attend more cultural events, take up new hobbies. Your plan should be customized to a realistic appraisal of your own lifestyle and likely future preferences.
● Retiring 1-3 years too early. Just because you have reached “retirement age” doesn’t mean you can afford it, especially if you didn’t invest properly throughout your life. See mistake number one. Make sure that you fully understand Social Security benefits and your personal needs before you make the decision to call it a day.
● Not planning for the correct time horizon after you actually retire. Think about your probable life expectancy, based on your medical history and, if you are married, remember that you must think in terms of the longer of two spouses’ life expectancies.
● Not having an estate plan. Putting an estate plan in place is essential and should happen long before retirement. It still surprises me that people can plan for their retirement, know how much money they need to live in a certain style for a certain time, and still “forget” that they also want to leave a substantial sum to their kids.
Five Positive Steps to Help you Look Ahead
Here are 5 things you should do right now that will help you to make a plan, stick to it and maximize your chances of a worry-free financial retirement. These are the same things I tell my own friends when the subject comes up over a glass of wine! If you need help, our Retirement Planner Tool and complete financial dashboard can help you set up a plan and start working toward it.
1. Know where you stand. Know your net worth, current income, expenses and savings patterns.
2. Set a concrete, time-bound goal. For example: “I want to retire by age 60 and spend $50,000 per year.”
3. Use a retirement calculator to determine how much you need to save each year to reach your goal, then figure out how to adjust your spending to make that happen. It may mean something small, like limiting meals out, or something big like downsizing your home or relocating to a less expensive city.
4. Put together a disciplined, low-cost investment strategy—if you don’t have the time or expertise to do this, delegate the job to a Registered Investment Advisor (RIA) who is a fiduciary to you.
5. Regularly check in to make sure that you hit your monthly savings goal and rebalance your investment portfolio at least annually. Our Investment Checkup Tool makes this step incredibly easy to evaluate where you stand relative to your goal and determine when the time is right to begin your retirement.
The bottom line is that everyone should at least have a retirement plan. Nobody wants to keep working when they would rather stop and nobody wants to struggle with financial hardship when they finally retire. The sooner you put a plan in place, the higher your chances of succeeding!
Michelle Brownstein, CFP
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