Retirement Planning: Common Mistakes
When it comes to funding your retirement, you have to watch your step. Many people assume they will need less than 50% of their pre-retirement income to sustain their retirement lifestyle, but have you really thought about it seriously and realistically? Do you think that 50% of your pre-retirement income would really cover your plan to travel around the world, dine at high-end restaurants, and pay for unexpected medical expenses? Watch out! To learn from the past, let’s look at the common mistakes many of us make.
Many of us often underestimate the effect of taxes in our retirement plan. With a tax-deferred investment such as an annuity, IRA or 401(k), your money can accumulate free from tax until you withdraw it at the age of 59½, which means you’ll have a larger sum of money to generate more retirement income for a longer time period. Any withdrawal before the age of 59½, however, may be subject to a 10% IRS penalty and is fully taxable.
Like taxes, inflation can erode your investment savings. When funding for retirement, consider the fact that 1 dollar today may only be worth 44 cents or less in 20 years based on a conservative annual inflation rate of 4%. With that said, you may end up needing double of what you have saved for your retirement funds. Do not let that happen to you! Keep an eye on inflation - when prices rise, your retirement funding goal should also keep up.
In addition to taxes and inflation, having a properly allocated portfolio is also important to successful retirement savings. For example, if you are in your early 30s and have many years until retirement, an asset allocation that is too conservative (e.g., investing only in bonds) may hurt your ability to accumulate enough for the future, especially after taking the effects of taxes and inflation into account. On the other hand, if you are a retiree in your late 60s, investing too aggressively (e.g., investing only in growth stocks) could keep you from meeting your income needs and expose your portfolio to more risk than is necessary. Remember, all of your investments should work together to help you reach your goal.
All in all, there are many other factors like time spent in retirement, unrealistic investment expectations, and false understanding of investment returns that could potentially obstruct your retirement funding. Perhaps you will live up to 100 years old but only planned for enough to support you up to 85. Or perhaps you are easily affected by market fluctuations and buy at the top and sell at the bottom. These are all factors that could deter you from investing properly for your future.
Summary
- Understand your financial goals
- Prepare an investing plan on how to achieve your goals
- Stay committed to your plan for the long run