Financial planning is a critical subject that impacts virtually all aspects of our lives. After all, it’s the umbrella that encompasses subject areas that, in and of themselves, can comprise a rather broad and complex set of issues.
For instance, its domain includes debt management, retirement planning, other goal planning, qualified retirement plans, how to minimize income and estate taxes, the gamut of insurances, investment products and strategies, and charitable and estate planning.
Even though the aforementioned subjects by themselves are impersonal in nature, they can have a profound impact on the quality of people’s lives and relationships.
My only point is that there’s no way to address even the most important retirement planning concept in one article, or even in a single book for that matter.
With that in mind, I’d like to point out seven serious mistakes when it comes to retirement planning. In avoiding these, you’ll go a long way towards securing a successful retirement.
- Failure to Plan
One of my observations over the years is that without a formal financial plan, it doesn’t matter if your income is $30,000 or $300,000 a year – what comes in the door tends to go out the door.
Planning is the foundation upon which all financial decisions should be made. It enables you to focus on what’s important (your goals) and lays out actions needed to succeed. Oftentimes, we can’t do everything immediately, so we need to prioritize goals. Your plan should be in writing and should include a time table for each goal.
Also, it should be reviewed annually and revised for any life changing events such as marriage, divorce, children, job changes, etc.
- Putting Off Saving for Retirement or Not Saving Enough
This mistake can be largely attributed to lack of planning. However, even with a plan, it’s a common human tendency to procrastinate. See The Motley Fool article “Waiting to Save for Retirement? Here’s How Much It’ll Cost You”.Delaying commencement of savings costs valuable time that can never be recovered, and time is crucial when it comes to the power of compound interest.
- Lack of Tax Planning
I’m addressing tax planning as an issue separate and apart from income tax preparation. Tax planning is actually important in all stages of life. For the pre-retiree, it should go without saying that the more dollars saved through tax reduction, the more dollars available to support your retirement goal and the more dollars that you can leave your beneficiaries. Tax regulations are constantly changing; therefore, you need to be aware of the changes as well as what you can do to minimize any detrimental impact.
- Borrowing from Your 401k
It’s tempting because you tell yourself it’s your money, but unless it’s truly an emergency that can’t be met with an emergency fund (the lack of having one is actually another mistake) or in any other way you shouldn’t go there. In most plans it must be repaid within 5 years. If you leave the employer before it’s paid off, you’re obligated to pay back in 60 to 90 days, or it’s treated as a taxable distribution and if you’re under the age of 59 ½, there is an additional 10% tax penalty.
As if this isn’t enough, you might have to suspend or reduce new contributions to the plan, as well as any employer matching, all of which could significantly impact investment growth. The long-term result could mean a delay to your retirement goal.
- Claiming Social Security Too Early
Even though you can claim at age 62, it’s best to wait if you can afford it. Unless you believe that because of health issues you won’t have a normal life expectancy, it’s wise to wait at least until your FRA (Full Retirement Age).
Let’s assume your FRA is 67. If you begin benefits at 62, your monthly check is reduced by 30% for the rest of your life. If you delay until age 70, you get an additional 8% in benefits each year between 67 and 70.
Sometimes, it makes sense to initially withdraw more from your investments so that you can delay taking from Social Security allowing time for the benefit amount to increase.
Keep in mind that claiming strategies can be different for couples, widows/widowers, and divorced spouses.
Both Spouses Not Committed to Plan
If you’re married, your spouse needs to be all in when it comes to planning. If not, your chances for success are greatly diminished.
Also, both spouses need to be familiar with all financial matters. It’s really sad to see the aftermath following the death or severe impairment of a spouse who unilaterally handled all the finances. The other spouse ends up having to make important decisions, sometimes in short order, and is subject to making irrevocable mistakes. To further complicate the situation, they are also struggling emotionally with the loss of a loved one.
- Not Addressing Long-Term Care
This is perhaps the most difficult subject that I have to address with clients. It’s not what anyone wants to think about, much less plan for.
Yet, it’s something many people will need at some point in their lives. According to the US Health and Human Services Department, about 60% of those turning 65 can expect to use some form of long-term care in their lifetime. Especially for retirees, who have assets and investments to protect, it’s probably the greatest threat to their financial wellbeing.
But the cost of long-term care insurance is expensive, especially if you wait until you’re older. Furthermore, once your health begins deteriorating, it may not be possible to purchase. I recommend that, if possible, to apply for a policy by age 55.
Due to the cost, it might make sense to buy some coverage and self-insure for the remaining potential exposure. Also, recently, alternative products such as life insurance and annuities have long-term care riders, which might prove to be the best solution.
The bottom line is that retirement needs to be more than a dream that hopefully comes true. Spend time now, if you haven’t already, and develop a plan of action that will help turn your dream into a reality. A bonus for having done so is the peace of mind that you’re on a journey towards a successful retirement.
Contact me if you would like some help or a second opinion regarding your retirement plan.