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!
Top 5 Retirement Planning Pitfalls to Avoid
Here are 5 of the most common mistakes people make, and why you should avoid them:
- 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.
- 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.
- 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.
- 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.
- 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 firstname.lastname@example.org or visit www.sdretirementplans.com.