Imagine sky diving without a parachute, scuba diving without an oxygen tank, mountain climbing without rope. We can all agree it’s impossible and insane to achieve any of these pursuits without proper planning and equipment. The same is true of retirement planning; yet people continue to attempt to retire without a (proverbial) parachute, oxygen tank or a rope – without proper preparation. So let’s look at the biggest retirement planning mistakes and ways to avoid them.
Before we do that, let’s talk briefly about what happens without proper planning. You won’t see an advertisement promoting retirement with a picture of a senior citizen working at Walmart, or of someone trying to choose between paying for prescription medications or food. What if your home was being foreclosed because you couldn’t pay the mortgage? These are common scenarios that happen every day to people of all socioeconomic classes, including those who had previously been considered well off. People who find themselves the victim of poor planning will tell you they made mistakes that could have been avoided.
FAILURE TO PLAN IS PLANNING TO FAIL
For those who make financial security a priority, both now and in the future, you’re 90% of the way to success. Those who fail to plan are not saving diligently, tend to have little or no insurance (life, disability, P&C), are more willing to take on debt, are focused on consumption, and don’t take full advantage of company benefit plans or government tax incentives. Frequently the mentality of those who fail to plan is to live for today, to heck with tomorrow. This mentality almost always leads to financial hardship later in life. Keep in mind that there are different levels of hardship. For the family who consistently had a six figure income and saved modestly, financial hardship may not mean true poverty, but rather living at a much lower standard of living than what they were accustomed to.
RETIRING TOO SOON
It’s not uncommon for people to become tired of their job and simply quit, proclaiming they have retired. Retiring three years too early can shave up to 10 years off of a funded retirement plan. Running out of assets in your late 70’s or early 80’s will force tough choices and make the discomfort of working pale in comparison to living in financial destitution. When looking at the significant positive impact of working an extra year or two can have on your retirement plan, you might just value your job more. Beyond the money it provides, a few extra years in the labor market can bring dignity and peace of mind later in life.
RETIRING FROM SOMETHING vs. RETIRING TO SOMETHING
For many, retirement is a race to the finish line. Part marathon and part sprint, their primary focus is simply to finish working. Research has shown that people with the most fulfilling retirement have a strong focus on family, pursue their faith, frequently exercise, and are involved with community organizations. These four items create focus and purpose that contribute to a fulfilling retirement. Notice that not one revolves around money. Prior to retirement, be sure to be fully engaged in pursuits that go beyond work.
YOU CAN DO ANYTHING YOU WANT – BUT NOT EVERYTHING YOU WANT
When you retire and find yourself with excess free time, and more money than you have ever had in your life, you may have a desire to pursue new and exciting interests. Sometimes retirees will purchase a second home, buy a boat, renovate the house, purchase new cars, take exotic vacations, etc. Typically, you are able to do anything you want; but rarely can you do everything you want. For people who have lived on a budget and saved consistently throughout their working years, a retirement without the constraints and regiment of a job can cause some to lose perspective. It’s important to maintain a budget in retirement and keep your splurges to a minimum.
COLLEGE vs. RETIREMENT
The best retirement plans have been thrown off track when children begin college. Frequently retirement savings will take a back seat to paying for college. There are several solutions to this problem. One solution is starting dual savings for retirement and education as soon as your children are born. If you start saving early, the amount you will need to save will be far less than if you try to pay for college out of pocket when your kids reach that magical age. Next, be sure to set clear guidelines with your children for how much you’re able to pay. This amount can and should constrain the schools they apply to. Why let Billy or Susie apply to the Ivy League schools when you can afford $10,000 per year of tuition? Another option is that your kids can work hard and pay for their education on their own, with the help of financial aid, summer jobs, student jobs and scholarships. If you are still coming up short in funding college, consider taking out student loans and helping your kids payoff the debt. The old adage is that you can take out loans for your children’s education; but you can’t take out loans to pay for your retirement.
PROFESSIONAL vs. DIY
It’s interesting to me that people will go to a dentist for help with their teeth, visit a doctor to care for their health, take their car to a mechanic to have it fixed, have their hair done by a hair dresser, but will try to manage their finances on their own. Many retirement plans fail because people do not consult a financial advisor. As a result, mistakes are made that cost them hundreds of thousands of dollars. A good financial advisor will assist with structuring an appropriate investment plan, coordinate your retirement income, minimize taxes, minimize risks, incorporate your estate plan into key decisions, and more.
The retirement planning mistakes discussed above are real and relevant. Reading a retirement planning book or a well written blog is a good start to preventing these mistakes. But it takes more than that to have a successful retirement. The most successful retirements happen when people are thoughtful, and make decisions based on goals that go beyond just money. When thinking about your retirement goals, it’s important to dig deep into the purpose and meaning of each goal. When you identify the most important things in your life and focus on those things, your life decisions (including financial decisions) more easily fall in line. As a result, you’re less likely to make the above mistakes.