Planning for retirement can often be stressful and quite complicated. Jim Puplava of Financial Sense Wealth Management shared 10 of the most common retirement planning mistakes he's seen on a recent edition of our Lifetime Income program. He identifies how you can avoid these common mishaps to create a more stable future for your retirement years.
1. Not Following a Retirement Plan
“You’d never take a road trip or vacation without having a plan as to how you’re going to get there. You’d want to consider your transportation, where you’re going to stay, where you’ll visit and the entire cost of the trip before you take off.” Puplava suggests treating your retirement plan in the same way. He advises making an appointment with a Certified Financial Planner who can help you create a retirement plan. You’ll cover everything from investments, disability, life insurance, your savings, and things like your estate plan and taxes. Puplava added, “most people find once they made a plan it’s not nearly as bad as they thought.”
2. Lack of Sufficient Savings
If you don’t save enough through a retirement plan at work—Puplava’s preferred method—or via personal savings, you’ll be left with few options when you do retire. Take advantage of an employer-provided retirement plan, which allows your contributions to be tax deductible. He explained, “often your savings are doubled thanks to employer-matching contributions, not to mention the tax benefits. So in this case, you win both ways: you save on taxes and you get additional money that comes from matching contributions from your employer.”
3. Poor Investment Choices
“I’ve seen some real doozies when it comes to making investment decisions,” Puplava noted. He’s seen everything from “get-rich schemes, investing too conservatively or aggressively.” For investing in the stock market, dollar-cost averaging is a great way to go. If stocks are going down every single month, the money you put in is going to be buying shares at lower prices. And in 20 or 30 years from now all you’re concerned about is how many shares you own. As you age, he said, “that percentage should be reduced, and then reduced dramatically shortly before you retire; we like to see people really de-risk around five years before retirement.”
4. Sequence Risk
When you’re young, you can afford to take risks. You can ride out a bear market or recession, but you shouldn’t take great risks financially the closer you get to retirement. Puplava said he’s seen individuals who are five or 10 years out from retirement and realize they don’t have enough saved. “They start doubling down, taking big risks, thinking they need to shoot for bigger and higher returns to make up for the lack of money they have saved.” This can be dangerous territory to enter, Puplava pointed out, because you don’t want to suffer losses between 40 and 50 percent like we’ve seen in recent decades. Rather, consider alternatives like working longer in order to save more. You’ll also want to have a greater portion of your portfolio in liquid, safe investments like high-quality corporate bonds, short-term Treasuries and blue-chip stocks such as utilities or consumer staples, Puplava said.
5. Taking on College Debt
Typically, when your children start college, you’re in the pre-retirement stretch when you should be maximizing your pension contributions along with your personal savings. However, Puplava’s seen plenty of parents take on loads of debt, using up their home equity which can really set them back financially. Puplava advises parents to consider what he calls his "Two Step Program": the student first enrolls for two years at a junior college and then moves on to a state university while living at home. The student also holds a part-time job to assist in expenses. “This allows the student and parents not to take on any debt,” Puplava said.
6. Retiring Too Early
The average couple in the U.S. who retires at age 65 is likely to live 20 to 25 years into retirement. Puplava stated “your assets have to last for a longer period of time, especially in the latter years when your medical expenses are much higher.” He added, “you’re also going to be subject to the ravages of inflation.” Puplava said retirees are subject to higher inflation rates due to one main reason: rising medical costs due to aging.
7. Underestimating Medical Expenses
You don’t want to save for your entire life and then have poor health once you reach retirement and not be able to enjoy it. When you’re putting together your retirement budget, Puplava advised setting aside a minimum of $11,000 per year in a savings account to be used for out-of-pocket medical expenses as you get older. Even if you’re in good health now, Puplava said sooner or later you’ll have additional medical expenses, even long-term care expenses. “Medicare and Medigap insurance continues to rise…people mistakenly think Medicare covers everything and it doesn’t.” Puplava suggests putting money aside in a specific health savings account so it grows tax-free and when you do pull the money out to use for medical expenses, you won’t owe taxes on it.
8. Poor Social Security Decisions
“Couples who retired too early, often make a big mistake; they take their social security benefits at age 62.” Doing this can reduce your benefits by 25 percent, he said. Taking your Social Security early, at age 62, reduces your benefits by $550 a month which is $6,600 a year. But, if you’re able to extend taking your social security until age 70, your benefits increase by 32 percent. To put it all in perspective, Puplava explained that “with today’s current interest rates in the three percent range, you would need $750,000 to make up the difference between taking your benefits at age 62 versus waiting until age 70.”
9. Moving to the Wrong Place at the Wrong Time
Many people consider relocating in retirement in order to find a city with lower housing costs, or a state with lower taxes or better weather. However, there can frequently be hidden costs in these situations. Puplava identified Washington state as a common example: “they have no income taxes—sounds great right? It is, until you find out they have a 20 percent estate tax.” Other important factors to consider before making a move include your proximity to high-quality medical care and the quality of life for seniors in the desired area.
10. The Post-Retirement Spending Spike
Many new retirees often spend more in their first years of retirement because they’re doing all the things they couldn’t while they were working. “People go traveling, play more golf, join country clubs, do home improvements, or maybe they add new hobbies into their routine. All of these activities cost money and often take money from capital they will later need to live on,” Puplava said.
Just as you would plan for an upcoming trip, considering costs, lodging and activities, your retirement should be no different. Puplava believes “you owe it to yourself to treat your own retirement the same way.”
Advisory services offered through Financial Sense® Advisors, Inc., a registered investment adviser. Securities offered through Financial Sense® Securities, Inc., Member FINRA/SIPC. DBA Financial Sense® Wealth Management.