What are the biggest blunders those planning to retire make? With so much information on retirement available, you'd think we'd all be experts. But apparently we're not. The following are some of the common mistakes that people planning for retirement make that could cost them later. Saving Too Little: According to the Bureau of Economic Analysis at the U.S. Department of Commerce, the personal savings rate still seems to be hovering between zero and one percent. The Employee Benefit Research Institute reports that 7 out of 10 of workers are saving for retirement, just not enough. They report that more than half of the workers who are saving have less than $50,000 saved. If those sobering statistics are enough to get you to start saving for your retirement, I don’t know what will. But there are the other experts who have the opposite view. In the last year or two, several academics have been publishing papers telling people what they want to hear: i.e., that they’re actually saving too much! Typical are the comments of John K. Scholz, et al., in a 2006 paper entitled “Are Americans Saving “Optimally” for Retirement?” in the Journal of Political Economy. “We find strikingly little evidence that . . . households have undersaved,” they claim. Some of these academics charge that due to their economic interest in fat 401(k) accounts, the mutual fund industry is leading the charge for oversaving. Don’t believe it. The answer to the question of whether you’re saving too much is comes in your account statements at the end of every month. You know you need to save more. When it comes to saving you can never argue with the maxim: “more is better.” Thinking You’ll Live Forever: No one wants to think the party will ever end, but one day it will. Living for today – running up credit card debt, taking on a big mortgage, and living paycheck to paycheck – assumes you'll have a lifetime to pay all that money back. Someone age 45 who takes out a 30 year mortgage won't pay it off until age 75. Are you planning to be working at age 75? Given that average life expectancy is 77.8 years, that translates into 2.8 years of living without a mortgage. When people think about debt the focus only on the monthly payment. Instead think about how many hours of working it will take to pay it off and how old you'll be when you own your home (instead of the bank). Looking at it that way may convince you to buy a little less house and become financially independent sooner. Remember no one lives forever. Buying into the “Dream” Retirement: Many people saving and planning for retirement suffer from the curse of unrealistic expectations. The retirement industry has convinced many of us that you'll need millions to retire. Otherwise, they warn, you end up eating cat food. Sure, if you want to live in a million dollar house on the eighteenth green, you'll need millions. But if you're just a regular Joe or Josephine making an average salary, don't fool yourself. You'll never get there. So stop killing yourself trying. Instead, adopt realistic expectations. It doesn't mean you can't retire happy and financially secure, it just means that you'll have to be more creative and adjust your expectations. My wife and I are spending a few months this year traveling by RV on the beaches of the Mexican Pacific coast. I was shocked to learn that there are people here that pay more than $2,000 per week to stay down here, that's just for their lodging, not food, margaritas and suntan oil. We'll spend our time here under the same sun, eating the same food, drinking the same margaritas and slathering on the same suntan oil for a little under $3,000 per month! That includes our food, lodging, and everything else. We're not scrimping either. We're just being smart. Of course, we don't own a condo or anything else other than our gently used RV we call “Gus,” that we got a real deal on a few years ago. We're having just as much fun. And this is the more expensive part of our year! Investing Too Conservatively: After the recent downturn in the market you may find yourself opening your investment account statements this month and feeling that lump in the pit of your stomach as you learn how much money you have lost. This horrible feeling may prompt you to look for investments with less risk and volatility. The problem with low risk, low volatility investments is they usually provide lower returns too. These returns often don't keep pace with inflation. I, myself, am guilty of investing too conservatively. I hate opening up my statement and learning that I lost a big chunk of money. I forget how elated I have often been when the opposite happens. When the stock market goes up I feel on top of the world. You and I both have heard that stock investments have historically earned much more than bond and fixed income investments (like bank certificates of deposit), over time. They're just more volatile, meaning that the swings in value are much greater that a bond or a CD. That makes them scarier too, especially in times like now. Right now, since the stock market is in the doldrums, some experts say it's actually a good time to buy stocks. This, of course, is contrary to your (and my) natural inclination to invest more conservatively in times like these. True, in the short term the market downturn may have a little further to go and you may feel like a chump when you open your statement in the next few months. But one, three or five years from now you'll probably thank yourself for ignoring your fear and investing in more in stocks as opposed to going conservative. That's not to say that CDs and bonds shouldn't be part of a diversified portfolio. You just shouldn't rely too heavily on them. Taking Too Much Risk. The flip side to being too conservative is taking too much risk. Many people who get a late start on retirement consider making more risky investments in an attempt to make up for lost ground. That's not investing, it's gambling and late starters shouldn't gamble with their retirement. As the first quarter 2008 stock market downturn demonstrated, investments can go down as well as up. By making risky investments, even investments that have the potential for high returns, you may end up even worse off. Panicking When the Market Goes Down: I'm guilty of this one too. My latest bad move was in January 2008 when the market plummeted the Tuesday after the Martin Luther King holiday. Over that long holiday weekend, I spent some time reading about how far the market had fallen since the beginning of the year and how much more the “experts” predicted the market would plunge. So I panicked and put in a sell order for my Dow Jones Index exchange traded fund. I'll planned to get out before all the other chumps. The problem was that everyone else was reading those same articles and thinking the same thing. So on Tuesday morning the market plunged hundreds of points and my fund sold at the lowest possible price. It couldn't have been worse and, of course, it turned out that I was the chump as the market recovered somewhat during the day and over the next month. Luckily, I didn't bet the farm and only lost a few thousand dollars. But it provided a good lesson to me, yet again. Intellectually I know better than to make investment decisions based on emotion. It just goes to show you that fear is a difficult emotion to overcome. Ignoring Social Security: You hear a lot of people say that they don't expect to receive Social Security when they retire. But if your planning for retirement I don't recommend that you discount it altogether. Sure, there are going to be some adjustments made to the Social Security System and benefits will most likely be reduced, but I predict that there be something for me from Social Security when I retire. Today about one third of current retirees look to Social Security for their entire retirement income and two thirds of retirees collect a majority of their retirement income from Social Security. While I don't think you should base your whole retirement plan around your Social Security check. On the other hand, I don't think you should entirely ignore Social Security either. Want to learn more about retirement and retirement strategies? Then order Who Said You Need Millions? - Retirement Strategies for the Rest of Us. Back (c) 2008 by Jonathan D. Edelfelt. 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| Retirement Planning Mistakes - How Many Have You Made? (Don't worry we've all made a few) by Jonathan D. Edelfelt |
