5 Common Mistakes People Make in Retirement Planning
5. Ignoring healthcare costs. Many people think that health care is cheap or even free in retirement, due to Medicare. It can be quite a shock to realize that Medicare Part B premiums can be as high as $460.50 for high-income earners. Medigap plans and other out of pockets costs add up as well. And none of this includes long-term care costs, which average over $4k per month for home health assistance or over $8k per month for a private room in a nursing home.
4. Being too conservative. People are often retiring earlier, and living longer. It is not uncommon to have 30 year retirement periods. That is a lot of time to be living off of a portfolio. Folks who do not have a growth element to their portfolio face an uphill battle. Investing shouldn’t stop when retirement starts. An ultra conservative portfolio (CDs, cash) will struggle to keep up with inflation, and will not provide any real-dollar growth.
3. Not accounting for the 2 year travel bump. The first two years following retirement are the most heavily travelled for most people. It should come as no surprise that puts a serious strain on retirement savings right out of the gate. A down market coupled with high spending at the starting line of retirement can be a “1 – 2 punch” that can be difficult to recover from. Be realistic about your retirement spending when doing your forecasts.
2. Not saving enough money. This might be too easy, but it is true. I’ve heard it many times, “if I had a million dollars, I could retire”. Often, this comes from people earning in the solid 6 figures. $1 million dollars in an IRA is worth about $30k of spendable money (depending on individual tax brackets) per year (adjusted upward for inflation each year), if you want it to last 30 years. It can be quite the wakeup call to realize that money doesn’t go as far as it seems. People need to amass far larger sums of retirement money than they typically think.
1. Miscalculating your budget. Not being realistic about spending. I’ll go through planning exercises with people, and ask “how much do you typically spend each month?” Of course, there are some who have a detailed account of where every dollar goes. But far more often, the question is met with a blank stare that slowly develops into a sheepish smile, and an estimate is provided. Let’s say, $5k a month. So I ask how much a typical paycheck is, and maybe it is $6k net, twice a month. “Wow, that is fantastic”, I reply, noting that they are saving $7k per month, “that is a strong savings rate. So I suspect there is a large savings account, or non-retirement investment account somewhere?” “Uhhh, well….no. I guess I spend a little more than I thought,” comes the reply. When forecasting out into retirement, having a reasonably accurate spending number is critical. It is the foundation of a financial plan. You really can’t determine how much you need to save, without knowing how much you plan to spend.