Five Retirement Pitfalls to Avoid

The economy continues to sputter, with the stock market’s highs and lows looking like an EKG readout. It’s easy to become distracted by immediate needs and forget the importance of retirement planning. Many of us have the best of intentions with our retirements plans, but make mistakes that catch up with us when we can least afford it: during retirement. Look at these five pitfalls and be sure you avoid them. 

1. Forgetting About Inflation

More and more seniors are outliving their retirement savings. It’s important to figure out a comfortable yearly income during your golden years that will last as long as you need it. It’s not just about stashing away money. You also need to figure out how much that money will be worth when adjusted for inflation.  

When figuring your expenses, look at your necessities and your discretionary spending. If your home is not paid for by the time you retire, you need to include rent or mortgage costs. There will be taxes, home insurance, health insurance, monthly utility bills, car maintenance and insurance, food, clothing and medical copayments. For discretionary spending, you should consider gifts for birthdays and holidays, entertainment, vacations and travel.

Once you know your basic budgetary needs, you should realistically expect to live to about 85 years old, but retirement age is generally being pushed back as well. If you want to retire at the traditional 65 years old, you’ll need 20 to 30 years worth of income. Next, you need to adjust for inflation. One online inflation calculator says that $10,000 now is likely to be worth only $4,738 by the end of your lifetime. Of course, this is a gradual increase over time, but you must consider that your yearly income must go up over time, not stay the same.

2. Retiring too Early 

Just because your parents retired at 65, that doesn’t mean you should. You can retire as early as 62 and receive Social Security payments, but your benefit will be reduced significantly. You can delay retirement until age 70 and receive additional benefits than you would if you retired at the full retirement age of 66. 

When deciding what age you can retire, you should think about how much you will be able to access from your own retirement savings each year of your retired life.  Estimate 4 to 6 percent of your total amount saved as your yearly income. If you can earn $20,000 a year from your own savings, you can then calculate at what age you must retire to get sufficient Social Security benefits to make up the difference. 

3. Failure to Make Withdrawals Wisely 

The best way to withdraw funds can depend on the mix of assets you have available. Some will gain a tax advantage by withdrawing from certain accounts ahead of others. A trusted financial advisor or tax profession can best advise you on how to prioritize withdrawals. 

4. Diversification is not Asset Allocation

As we are all too aware these days, markets fluctuate. Economies rise and fall and investments can make or lose money. Some believe that diversifying investments, or investing in several different sectors of business, will overcome such market changes. Instead, they should be looking at asset allocation to have several different kinds of investments. As you age, the assets kept in riskier investments should decline while you place more funds in safer endeavors. Otherwise, you could lose everything close to retirement age during a stock market crash. Get solid financial advice on the best way to allocate your investments.

5. Reactionism 

Good and bad things happen and the media seeks to gain your attention with the catchiest headlines. Remember than news programs are paid for by advertisers. Networks can get more revenue by getting more of the audience’s attention. This arrangement encourages sensationalistic reports that may make individuals anxious. 

Do not let your financial decisions be influenced by the news and your anxious feelings. Stick to the strategy you and your advisor have mapped out. Only with discipline will you reach your retirement goals.