We have talked before on this site about the decision to pay off debt or save for retirement, and also have addressed things to consider when trying to make the most out of your retirement. However, before we can get too deep into thinking about these finer points, we must first be sure not to commit certain common retirement planning mistakes.
Over the last 6 or 7 years, there has been so much talk about the future of Social Security.
The ratio of working Americans to those fully retired is continuing to decline. This decline is actually expected to accelerate over the next decade or two, and that means that there will not be enough workers to support those collecting benefits.
Since the program works by collecting funds from the paychecks of today's workers, and using that money to pay the benefits of today's retirees, having too few workers will leave the Social Security Administration with too few funds to pay out benefits.
Most people believe that Social Security benefits will be cut – as well as the age of eligibility rising – within the near future. Some even think that the program will not be around at all by the time those in their 20's and 30's retire.
Since there is an extremely high probability that your Social Security benefits will not be enough to support your lifestyle in retirement, then it doesn't make sense to rely on them – as John Mauldin always says, “hope is not a strategy!
When considering how large a role your Social Security benefits will should in your retirement planning, it would be wise to discount the estimates according to your age. The closer you are to retirement, the more you can rely on your benefits being there for you, so you should apply a smaller discount factor. The further away you move from your projected retirement age, the higher your discount rate should be.
If you are in your 20's or 30's, it may be best for you to completely remove Social Security benefits from your calculations!
Not Knowing How Much You will Need In Retirement
Most clients that I meet with have no idea how much money they will need in retirement. I'm not even talking about the full amount of money they should have in their accounts at the time of retirement (a more complicated figure)! What I mean is that most people don't know how much their monthly or annual budget should be once they stop working!
If you don't know how much money you will need, how can you possibly plan? Most people think that all they need to do is save up to their IRA contribution limits and 401k contribution limits, and they will be ok.
However, based on a number of factors, they may need to supplement those accounts with other investments (including real estate). If you are not able to save enough to support your anticipated retirement lifestyle, you have several options.
You can alter your lifestyle to line up with your projected savings – this will mean having to make sacrifices in order to make ends meet in retirement. Many Americans hate this idea, because we see retirement as a time when we are rewarded for all of our hard work (even though most of us live as though we should be rewarded all throughout our lives). Maybe you can plan to live in a cheaper house/apartment, or cut back on the trips around the world.
Another option is to set things up so that you are able to work part time once you hit your golden years. You have have a hobby that has the potential to earn an income, but you are not able to develop it because of your current job. Begin to put things in motion to turn that hobby into a supplement to your retirement income (but be careful of taking the “fun” out of your hobby).
Instead of, or in conjunction with, the other options, you can alter your current lifestyle in order to save more for retirement. If you are really concerned with being able to fund your retirement, then you should be willing to make some sacrifices now, in order to have a more secure future.
Not Considering Inflation
If you are one of those special (in a good way ;-)) people who have taken the time to figure out a post-retirement budget, you have done well. However, there is still a chance that you have missed a critical component. You must factor inflation into your calculations in order for your numbers to be relavent.
When you sit down to figure out how much you will need each month/year while in retirement, be sure to consider the fact that inflation will cause those numbers to increase (if you are basing your estimates on today's dollars).
For instance, if you think you will only need $30,000 each year in retirement, that number will actually be about $66,000 in 20 years. Therefore, the total amount that you need in retirement will have to be greatly adjusted!
You also may want to consider wage inflation when it comes to determining how much money you will be able to put away for retirement. In either case, just be sure to be consistent, so that you can have a more accurate projection of your financial picture.
- Have you ever been “guilty” of committing these retirement mistakes?
- If so, what did you do to correct the situation?
- Would you rather sacrifice today for a more “lush” retirement, or live it up today, and deal with a scarce amount of resources in the future?