For most Americans, retirement is more complicated than it used to be. In the past, many employers offered a comfortable pension plan that would see their workers through retirement. Now, pension plans have become a relic of a bygone era, and most workers don’t stay with a single company for their entire careers like they did in the past – a decision which was strongly influenced by the draw of a nice pension.
When it comes to retirement, the working world has become less about what your company can do for you and more about what you can do for yourself. Social Security (if it is still around when you retire) will provide some financial support, but it certainly won’t cover the entirety of your retirement needs. If you want to establish financial security for your golden years, you will need to take the right steps with your retirement savings, and that includes avoiding some common money mistakes like the ones listed below.
#1 Waiting to Save
Retirement may seem a long way away, especially for young professionals. But getting a jump-start on your savings is a critical part of a successful retirement plan. If you wait to save until you are further along in your career, you’ll be playing catch up in your later years, which puts more financial strain on you. By putting aside money as early as you can, not only will you be able to save in smaller increments, but you will also reap the benefits of compound growth over decades as that money sits and collects interest for you.
#2 Being Too Selfless
At times, saving for retirement might seem selfish. After all, plenty of friends and family could use that money for myriad reasons from getting out of debt to buying a first home. But remember, if you don’t save for your own retirement, no one else is going to do it for you. Get your own financial house in order before dipping into your retirement for everyone else – and that includes paying for your children’s education.
Many parents want to start their children off on the right foot financially by covering the cost of college. According to an article by US News & World Report, the average cost of tuition and fees among ranked in-state public colleges was $9,687 in 2020-2021. While it’s a nice idea to fund your children’s education, you need to make sure it’s feasible. After all, there are plenty of student loan options available, but no “retiree loans” to speak of. If you cover the cost of college at your retirement’s expense, how will you recoup that money later?
#3 Making Early Withdrawals
All that money sitting there can be quite tempting, especially when emergencies arise – and they will. From unexpected medical costs to natural disasters, there can be compelling arguments for dipping into your retirement savings earlier than intended. It’s easy to convince yourself that you should take from savings meant for the future to deal with a situation happening in the present, but your retirement account is meant for just that – retirement.
Ideally, you should also have an emergency fund with three to six months’ worth of living expenses. That way, when a financial hardship comes up, you have a resource specifically designed for that purpose.
#4 Ignoring Inflation
We all know the realities of inflation. The value of your dollar really does erode over time, and that is something you need to consider when planning for retirement. The price of a gallon of milk, a tank of gas, a ticket to the movie theater – all of these cost more than they used to. As inflation increases, the value of your nest egg will decrease.
For example, if you were to retire at age 65, you could live for another 25 years or more. While the money you saved might permit for a $3,000 per month budget at the time of your retirement, that amount could wind up climbing over the years as the small increases from inflation compound. Take any of the items from above (the milk, gas or movie ticket). How much did those items cost thirty years ago in 1991? It’s imperative that you think about how much inflation might affect your monthly expenses during retirement.
#5 Refinancing for the Short Term
Refinancing and retirement don’t automatically go together, but it’s worth considering. In 2020, interest rates dropped below 3 percent, prompting many people to take advantage of the opportunity to refinance. While refinancing translates to a lower monthly payment and more cash flow, it has drawbacks as well.
When you refinance your mortgage, you may be extending the loan back 30 years. If you just bought your home a few years ago, this isn’t a huge concern. On the other hand, if you are in your 50s or 60s, you could be signing up to make mortgage payments well into your golden years. In most cases, your home is your largest asset, and if you happen to pass away before the mortgage is paid back, you will be leaving less equity to your heirs. If you do choose to refinance, make sure it’s with a long-term plan in mind.
#6 Failing to Consider a Plan for One
It’s difficult to fathom being without your significant other. In addition to the emotional toll such a loss will bring, you will also face financial consequences associated with their passing, including taxes, income and your estate. Some pensions and benefits will change when your spouse passes, and you’ll lose some Social Security income. Take a look at your will, life insurance, retirement accounts and other assets to make sure you are financially prepared to be on your own.
SEE ALSO: Ways to Build Wealth in Your Fifties
#7 Planning to Continue Working
An AARP survey revealed that 52 percent of respondents expected to work beyond the age of 65, which used to be the traditional age to retire. By working longer, you can avoid dipping into your retirement accounts. That means your savings will continue to grow, and you will also need to use that money over a shorter period of time.
But you can’t account for every eventuality. You may become ill and not be able to keep working. You may lose your job or have to leave it to take care of a loved one. Be thoughtful about the reality of working late into life as you consider your financial plan.
#8 Thinking You’ll Spend Less
How much you spend in retirement will vary depending on what your plans for your golden years look like. You may save some money by no longer purchasing clothes for the office, splurging on fancy lunches and filling your gas tank for your commute. However, you may have plans to travel extensively during retirement, start a passion project or buy a classic sports car. Be realistic about your spending expectations and then budget yourself accordingly.
The key to solid retirement planning is to be focused, patient and steadfast. Start saving early, keep saving over the years and avoid dipping into your retirement savings until you actually reach that milestone.
While it can be daunting to think about all the pitfalls surrounding saving for retirement, it’s important to be aware of these mistakes so you can do your best to avoid making them. By keeping your eye on the future, you can work toward your financial goals even when challenges arise.