Retirement planning takes decades of hard work, and it can sometimes be confusing and overwhelming. Fifty-six percent of Americans don’t have a clue how much they should be saving for retirement, a survey from Northwestern Mutual found, and roughly 1 in 5 have no retirement savings whatsoever.
Even if you are trying to save for the future, you’ll likely make some mistakes along the way, and that’s OK — as long as you correct them. Some errors are subtle enough you may not even realize you’re making them. However, they can throw your entire retirement plan off track.
1. Underestimating your expenses in retirement
Calculating how much you’ll likely spend each year once you retire is the foundation of retirement preparation. If you underestimate how much you’ll spend each year, you may not save enough by the time you retire and risk running out of money too soon.
Even slight miscalculations can result in major financial problems, too.
Spending even a few thousand dollars more than you’d planned each year adds up when you’re spending decades in retirement, and depending on how much you’re spending each year, that could mean outliving your savings by several years.
Of course, you can’t predict exactly how much you’ll need each year in retirement, and unexpected expenses — particularly healthcare expenses — will inevitably pop up.
But the more accurate your estimate is, the better chance you’ll have at saving enough.
To figure out how much you’ll be spending in retirement, it’s a good idea to create a retirement budget and map out all your expected costs. Even though you won’t be able to predict all your costs, getting a relatively accurate estimate will help ensure you don’t underestimate your basic living expenses.
2. Assuming Social Security will cover most (or all) of your expenses
Roughly half of recent retirees say Social Security benefits are their primary source of income, according to a survey from Nationwide. However, nearly a quarter say they’re receiving less in benefits than they expected.
The average Social Security check amounts to just $1,471 per month, which is hardly enough for most Americans to live on — especially as you age and healthcare expenses start creeping up. Social Security benefits are only designed to replace around 40% of your preretirement income, so if you’re expecting them to cover the majority of your retirement expenses, you could be in for a rude awakening.
In addition, there is the possibility that benefits could be cut in the future. Because there’s more money flowing out of the program than coming in, the Social Security program is facing a cash shortage and is expected to deplete its financial reserves by 2035. Although that doesn’t mean the program will fall apart completely (as long as workers continue paying their taxes, there will always be at least some money to distribute in benefits), it does mean benefits could be reduced in the future. Now, that’s assuming Congress doesn’t come up with a solution before 2035. But it’s a good idea to have a backup plan so you’re not placing your financial future entirely in the hands of the government.
3. Not having a withdrawal strategy for your retirement savings
You could save for decades, working diligently to build a strong and healthy nest egg. But if you withdraw too much too soon once you retire, it could undo all your hard work.
There’s no simple answer for how to plan your retirement savings withdrawals. Some financial experts recommend following the 4% rule, which states that you can withdraw 4% of your total savings during the first year of retirement, then adjust your withdrawals each year after that to account for inflation. That’s a good way to keep your spending in check, ensuring your savings have a good shot at lasting the rest of your life.
But the 4% rule isn’t perfect, and it assumes you’ll be spending the same amount (adjusted for inflation) every year in retirement — which isn’t always realistic. For example, you may spend more during your initial years of retirement as you travel and check off other bucket-list activities, lower your spending mid-retirement, and eventually spend more as you age due to health issues. In that case, it might be a good idea to discuss your plan with a financial advisor to figure out what type of withdrawal strategy fits your specific needs.
Making mistakes while planning for retirement is par for the course. Correcting them early ensures you’re on track to enjoy a financially secure retirement.
— Katie Brockman
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Source: The Motley Fool