The Importance of Retirement Planning, Pitfalls to Avoid & Top Tips to Follow

Written by Rick Pendykoski

Retirement planning is a crucial aspect of personal finance, and one that should be at the top of your list. Let’s look at why it’s important, what mistakes you should avoid and some expert tips on doing it the right way.

Why is Retirement Planning So Important?

Today’s workers want to be financially secure, as well as completely independent and free to follow their passions or interests after they retire. Without a proper plan and a sizeable nest egg, however, it becomes impossible to maintain the standard of living they’re used to.

Many people have no choice but to continue working after retirement, simply because they don’t have enough savings or income sources to keep them financially comfortable.

Today, it may seem that retirement is so far that you can afford to think about it later in life, but it’s always closer than you think. Proper retirement planning is especially important in today’s scenario, where inflation, low interest rates and market downfalls may also be working against you!

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Top 5 Retirement Planning Pitfalls to Avoid

Here are 5 of the most common mistakes people make, and why you should avoid them:

  1. Not Defining Your Financial Goals

This is the biggest mistake you could make, since you can’t get to a certain place without knowing what it is! The majority of people haven’t clearly defined their financial objectives for retirement, written them down, or started planning how to achieve them. When you commit to your goals by putting them down in writing, you can calculate how much you need to save and start taking action to make them a reality.

  1. Saving Too Little or Starting Too Late

It’s much harder to reach your retirement goals and maximize your tax benefits when you’re putting small sums of money in an IRA or other retirement plan every now and then. After all, the most important element of effective retirement planning is time. When you start saving and investing for your retired years early in life, and saving as much as possible, your money can grow into a large nest egg sooner.

  1. Expecting Pension/Social Security to Cover You

It’s no longer enough to rely on your employer’s pension plan or social security benefits, since many of these plans are under-funded already. There’s no guarantee that your employer or the government will be able to provide what you need, especially with longer life expectancy rates. Age often brings unexpected health-related expenses, and you don’t want to be left stranded or dependent on someone else.

  1. Spending Retirement Income Too Fast

Many retirees take out too much money from their nest egg every year, which depletes their savings as well as the potential growth for that money. Since people are living longer, it’s quite likely that either you or your spouse will need retirement income for 30 years or more, and you may also want to leave something to your kids. After you retire, the rate at which you withdraw your savings will determine how long they last.

  1. Investing Too Conservatively or Aggressively

This is another common mistake, where people worry about putting their savings at risk and end up with too little income in retirement, or place all their hopes on high-risk investments only to lose everything they saved. It’s important to diversify your portfolio, balancing the low returns from safe investments with potentially larger gains from riskier ones. Consult a financial advisor for guidance on allocating assets effectively.

Expert Tips for Retirement Planning in 2017

If you want to be financially comfortable later on in life, put these tips into action now:

  • Educate Yourself – The ‘fiduciary rule’ going into effect in 2018 requires brokers and financial advisors to put your interests ahead of their own commissions and earnings. Knowledge is power, so learn everything you can about the latest tax rules, contribution limits, growth benefits and investment options available.
  • Diversify Investments – With a self directed IRA, you can choose exactly where your retirement savings will be invested. Seek expert advice on building a balanced investment portfolio that leverages gains against risk, for maximum long-term benefits.
  • Avoid Debt – Debt is the biggest threat to your retirement security, so work on paying off existing loans, starting with the most expensive ones first. Stay away from future debt by making frugal lifestyle choices and avoiding unnecessary expenses.
  • Save More – Increase your savings every month/year and automate them if possible, so it becomes a habit. If you want to leverage tax benefits while saving for retirement, contribute as much as possible to IRAs and other tax-smart plans.
  • Manage Risk – Other than planning retirement income, set up an emergency fund and invest in insurance coverage that protects you against potential risk. Anything could happen between now and the time you retire, so take the right steps to protect your savings.
  • Plan Your Estate – Protect your loved ones in case of your untimely death with an estate plan that includes insurance. Other than defining asset distribution and providing for dependents, proper estate planning can also boost your retirement income.

If you haven’t already started putting money away for the golden years, it’s definitely time to start. Otherwise, you may find yourself facing a life of dependence and insecurity instead of the comfort and freedom you’d want to enjoy after retirement.

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He regularly writes for blogs at MoneyForLunch, Biggerpocket, SocialMediaToday, NuWireInvestor & his own blog for Self Directed Retirement Plans. If you need help and guidance with traditional or alternative investments, email him at rick@sdretirementplans.com or visit www.sdretirementplans.com.

Living Retired

Once you hit age 50 or thereabouts it’s normal to find yourself thinking of retirement. Hopefully you have been preparing along the way and find yourself financially able to make the move when you are ultimately ready. You don’t want to begin planning to retire in your 50’s – by that time there is not much runway remaining to launch your transition. But assuming along the way you have been diligent, consistent in your savings efforts, realistic about the future and more than a little lucky, when your second act rolls in you should find yourself able to relax and look forward to good times.

You might find living the retired life a bit challenging at first. After decades spent with others telling you what to do – also known as the job – as a retiree you suddenly find you are in control of how you spend your time. You decide what to do and when to do it. The freedom can be intoxicating – what an awesome opportunity to spend your hours in pursuit of what you love! But what if you don’t have any particular passions or have not yet identified any? Suddenly that independence can feel a burden as you try to fill your day with “things” to keep you busy, keep you engaged, and bring meaning to your existence.

And how do you define meaning in your new role as full time retiree? Back in the working world deadlines and goals helped determine success. A completed project provided a clear measure of accomplishment. Perhaps a promotion justified long hours spent proving yourself as it moved you ever higher in the food chain. In the working world things are more quantifiable. In retirement meaning is often a bit fuzzier, more elusive.

Not every moment need be spent in meaningful pursuit of noble causes. As a bone fide retiree you have earned the right to do nothing, to chill, and just relax. I think you better serve your cause by seeking a balance between relaxation and meaningful activities. On a little, off a little.

In retirement you don’t worry about fancy titles. In fact it is often those who held lofty titles in the working world who find it hardest to adjust to a life where fellow retirees are peers instead of subordinates. Power trippers beware – when you retire you leave your fame and glory behind. It is important to be happy with who you are outside of work. The good news is you can now spend time figuring out exactly who that person will be. Just because you are no longer contributing to the bottom line does not mean you cannot contribute to living a fulfilling second act.

Having focused long and hard on building your nest egg as you saved all you possibly could, don’t be surprised if in retirement you find yourself reluctant to part with those hard earned dollars. A reader of LoveBeingRetired explains his dilemma: “Spending money is a huge deal for me. Guided by a certified planner for the past 31+ years, we’ve saved and invested just for this very retirement period I recently started. With saving and living beneath means for so many years, I can’t seem to just flip the switch to start spending. NOTHING seems to be of enough value to me to spend the money. Everything seems SO expensive these days that I persuade myself that I can live without it.”

Who among us is free from the fear of running out of money? With realistic hopes of living 10 or 20 years as retirees an extended future is in store for many.  We all want our finances to last to the end. But it is important to remember what all the years of frugal living was intended for – to subsidize the retirement lifestyle we want. If we refuse to spend anything we risk missing out. A little prioritization of what really matters along with a bit of loosening of the purse strings can be just the ticket. Frugality is essential but so is balancing a heavy wallet with a happy heart.

Responsibility in retirement is different. To this point the focus has been on taking care of others whether a demanding boss or a dependent child. In the retirement world you are elevated to first billing. Your happiness is no longer automatically superseded by those around you. Now is the time to spoil you. The trick is learning to become comfortable with this new state of affairs. It is not always easy to let go or to trust in the abilities of others to get things done. But if you can, if you are able to direct your efforts toward you and your retirement happiness, you will have discovered one of the secrets of what it means to be retired.

When you retire you are afforded a glimpse into a new future, a future that is more in your control than any other time in your life. You obligations are fewer. Experience has taught you how to cope with not-so-easy situations. Your happiness matters. And if you hope to stay on track there is no place for regret. Worrying about the past is a waste. What you might have done differently is irrelevant since you cannot change or fix it. The important thing is what you do from this moment onward.

Retirement is only the beginning of a new chapter. Daily life will be interesting, sometimes exciting, at times challenging. Remember you are at the wheel. You chart your own course. Drive safely and enjoy the journey!

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