The 5 Biggest Retirement Planning Mistakes

One of the primary reasons that clients come to us at Glassman Wealth Services is they want to know if, and when, they can retire. Just the thought of retirement can cause anxiety and many feel overwhelmed and unprepared.

In fact, one of the biggest dilemmas for those approaching retirement is balancing the life they want to live today with the life they want to live in retirement.

There are some common, yet avoidable mistakes that prevent many people from retiring ‘on time’. But with some planning, you can steer clear of these 5 common retirement planning mistakes.

Retirement Planning Mistake #1: Living Too Large:

The first question I ask clients when discussing their retirement plan is, ‘how much income do you need to maintain your current lifestyle in retirement?’ Not surprisingly, for the vast majority the answer is, “I don’t know,” or they’ve made an inaccurate assumption. If the assumption is too high, the goal of retirement may seem absolutely unattainable, and the entire planning process is discouraging. If the assumption is too low, which is most often the case, the retiree could run into a difficult financial situation later in life and have to make drastic, unwanted changes.

The general rule of thumb is to figure that you will need approximately 80% of your current annual income in retirement. I have to say that I’m not a fan of this generality. However, most people underestimate how much money they will need in retirement.

Keep in mind that retirees spend more on travel, entertainment and eating out especially earlier on in retirement when they have the time and good health to enjoy those activities. In their later years, health care cost can escalate.

To get a more accurate retirement number, we like the Kiplinger’s Retirement Calculator. You will need to have some information handy like your estimated Social Security payment, any expected income from pensions and any retirement savings to date. While you will have to make some assumptions, it will give you a pretty good estimate of how much you’ll need to save.

Retirement Planning Mistake #2: Higher Health Care Costs:

One of the most overlooked areas of retirement planning is estimating what health care costs could be in retirement, and including this in the calculation of income needs. Fidelity estimated that a 65-year-old married couple that retired in 2012 will incur an average of $240,000 in healthcare costs alone in retirement. By overlooking this large potential outlay, retirees could feel strapped for cash in their most vulnerable years.

Often, people assume Medicare will cover these expenses in retirement but this simply is not true. Medicare costs to retirees are rising each year so it’s important to know what to expect. To learn more about Medicare costs, coverage and your options, read our Medicare Survival Guide.

Retirement Planning Mistake #3: No Plan for Long-Term Care:

Anyone who has cared for an aging parent knows first-hand the toll it can take on their loved ones and their savings. Both the time and money needed to provide quality care can be staggering.

According to the US Department of Health, 70% of people over 65 will require care at some point in their lives. In the DC metro area, the median annual rate for a private room in a nursing home is $109,580 and it costs $20 per hour for Home Health Care services, in 2013. Genworth has a terrific interactive state-by-state guide to help calculate future long-term care costs.

Given that 50% of claims last more than one year and medical costs are projected to continue rising faster than inflation, these costs adds up quickly.

It’s important to know your long-term care options and how you plan to pay for these future expenses if you need to. To get a better idea of what you should consider, read How Much Does a Long-Term Plan Cost?

Retirement Planning Mistake #4: Not Saving Enough Then and Now:

Don’t wait to start saving for retirement. The sooner you get started, the greater your chance of reaching your retirement goal because compound interest can work its magic. To quote Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

So here’s how the math works: To have $1 million at age 65, a 25-year-old needs to save $345 per month for 20 years then never save another cent, assuming the investments earn 8% per year over those 40 years. A 45-year-old would need to save $1,698 per month for the next 20 years to reach the same goal.

Those savings goals may be out of reach for both the younger and older person. The key is to make saving for retirement a priority and start saving some amount each month.

Retirement Planning Mistake #5: Not Updating Your Retirement Plan:

Markets rise and fall, as do levels of income and expenses, so it is important that your retirement plan be revisited every few years to take this into account. If your last retirement plan was done five years ago, prior to your second child being born, your spouse’s promotion, and your mother moving in, chances are your retirement plan is based on a lifestyle that is no longer relevant.

If you are one of the many folks under 65 that are out of work and struggling to find employment, you may be considering throwing in the towel to embrace early retirement. One of my favorite journalists, Mark Miller, recently wrote a great article, Out of Work and Under 65? Here’s How to Retool your Retirement Plan that outlines what you should do now that your previous plan is null and void.

Many financial planners will run a retirement plan and dust it off the shelf every 5 to 10 years. At Glassman Wealth Services, we don’t believe that is enough. You should revisit your plan every 3 to 5 years, or as your life changes with a marriage or children, so adjustments can be made accordingly. By making these adjustments often, you’ll stay on track for a better retirement.