9 Things to Avoid when Planning for Retirement
Many people carry their retirement concepts around in their heads.
They may imagine a luxurious recreational vehicle parked near a Florida theme park. Rounds of golf. Boating. Shopping. Taking a creative writing class. Gardening. Who wouldn't look forward to such a future?
Here are a few strategies guaranteed to turn your retirement into one memorable financial catastrophe after another.
Unless you like the thought of pinning your future on shaky government programs or handouts from relatives, take charge now. Once you're comfortable that you're sufficiently preparing to meet your retirement goals, grab those clubs and hit the course or go putter in your garden. It's time to reward your forward-thinking with a few birdies or begonias.
Buy more home than you can afford
No time like retirement to grab that McMansion you've always wanted. By opting for a house that'll turn into an albatross in the face of climbing property taxes, soaring insurance premiums, escalating maintenance and upkeep, you can ensure your home will become a real burden in your old age.
Dave Ramsey, personal finance expert and talk radio host, says to temper wants with needs. He said he read a recent poll in which 80 percent of Americans said they believed their standard of living will go up at retirement. "Our culture today tells us that we deserve to have everything we want because we can charge it. Previous generations thought you could only have something if you could pay for it. Their lifestyles were much simpler and retirement was a time to simplify even more," Ramsey says.
Do it right: Pay off your bills, including your home if you can afford to do so, before retiring. If you have to move -- or simply want to -- don't buy something you can't afford in the long term. Minimize repairs by keeping up with the maintenance.
Base your projected cost of living on today's expenses
You calculated your cost of living against your projected retirement income and things look pretty darned rosy. Chances are you didn't factor nasty old inflation into your budget.
Assuming an inflation rate of 2.2 percent that rises to 3 percent starting in 2017, what costs $10,000 in 2008 will go for $12,528 by 2018. In 2028, that figure will rise to $16,837. And in 2038, you'll need $22,628 for the same expenditure. If you retire at the age of 55 in 2008, you will be 65 in 2018, 75 in 2028 and 85 in 2038. People live longer these days -- but unfortunately for many, their money won't go the distance.
Do it right: Calculate future expenses with an eye on both inflation and increased longevity.
This means allocating a portion of your nest egg to higher risk, higher return investments such as equity mutual funds or purchasing an immediate annuity with an inflation adjustment component.
Raid your 401(k) or cash it out when you change jobs
Not everyone is lucky enough to have his or her own personal loan company, but with a 401(k), you can borrow your own money and, even better, pull it all out if you change jobs. What a cool way to pay off your credit cards or buy that boat you've always wanted. Not.Getting your hands on a boatload of cash might seem tempting, but going into your retirement savings before you retire should be a plan of last resort.
Do it right: Dip into your 401(k) only when there is no other choice and the reason is an especially good one -- like moving out of a rental and purchasing your first home.
Count on Social Security
You don't want any regrets when you look back at your life, so you've made a habit of living for the moment. Now the moment when you want to retire is nigh, and you plan to let the government take care of you. Social Security has helped lower cases of poverty among the elderly in this country, but it stands on unstable financial ground.
Do it right: Diversify your sources of retirement income as early in the game as possible. That means save in as many different types of tax-favorable investment vehicles as you can manage -- such as a 401(k) plan and an IRA. And save as much as you can.
Believe your retirement benefits won't ever change
Just because you were promised something doesn't mean it will come true. Don't believe it? Ask the employees at General Motors Corp., IBM, Alcoa, Sears, Circuit City, Hewlett-Packard, Lockheed Martin Corp., Motorola -- the list goes on and on. These companies have frozen their pension plans -- which means future benefits stop building up for some or all of their employees. Other companies have terminated their pension plans or converted them to "cash-balance plans," which are calculated differently -- to the disadvantage of older workers. Even the government is chipping away at pledged benefits.
Do it right: Don't take anything for granted. Make sure you set aside your own funds for retirement. Always have a plan B.
Let the kids' needs trump yours
You started saving money for Junior's education the minute he showed his face, but in the process you neglected to put anything aside for retirement. The result -- Junior has a nice fat college fund and you'll be working until you're dead. Unless you relish raiding your change jar to pay your electric bill, bump Junior's college fund down a notch on your list.
Do it right: Pay yourself first. The 529 plan takes a back seat to the 401(k) plan.
Count on your partner's income to always be there
Many seniors have a tough time making it on two incomes, much less one. Here are some of the facts about surviving on inadequate retirement according to Ramsey: "USA Today reports that out of 100 people age 65, 97 of them can't write a check for $600, 54 are still working and only three are financially secure. Bankruptcies among those 65 and older have gone up 164 percent in the last eight years."
Whew! That's scary stuff and a long way from that golf-playing, globe-trotting, low-stress retirement you envisioned.
If those numbers make you nervous, consider that thousands will face even more reduced circumstances because they've failed to consider that a big chunk of their income might end up missing in retirement. Death and divorce happen -- and they change everything.
Do it right: Women in particular should consider how dependent they are on their marriage when making retirement plans. Don't assume anything, and take a hard look at survivorship aspects of pension plans.
Plan to work forever
Age discrimination may be illegal, but it's alive and well and bound to impact your job plans for the future. In addition, many professions such as law enforcement, the military and aviation have mandatory retirement ages. Diseases associated with aging, as well as other conditions, can physically limit what you can do, effectively cutting short your post-retirement career.
Do it right: Continuing to work may not be in the cards for you. Turn employment into one of many elements of your retirement picture, not a major and irreplaceable component.
Don't worry about health issues
You look great. You feel great. You're active and haven't been sick a day in your life. You're worried about your golf game, not health issues.
But like it or not, aging often means deteriorating health, even for those who think they've done everything right. And deteriorating health means more money for health care. Really bad health can force retirement off-track and turn your finances into a train wreck.
Health benefits for retirees are slowly disappearing. Medicare does not cover everything, so many health care expenses fall on underinsured retirees. For couples retiring today, Fidelity Investments recommends a reserve of $215,000 -- just to cover medical costs.
Do it right: You can't forestall ill health forever, but you can live a healthier lifestyle starting now that will reduce your costs up the road. Eat less salty snack foods and more fruits and vegetables. Take daily walks or otherwise move your limbs. Your body will reward your efforts.