Calculating Risk and Investing Wisely

Avoid These 5 Retirement Mistakes

A low-stress retirement requires significant planning.

The absence of planning is why most Americans aren’t prepared for retirement.  A recent survey found that 63.39% of those responding reported retirement savings between zero and $10,000.

While not saving for retirement is the primary reason it is far from the promised “golden years” for many Americans, there are other common mistakes you need to avoid.

Here are five mistakes Americans make when planning for retirement.

Mistake #1: Not Saving Enough for Retirement

One of the most significant retirement mistakes is not saving enough. Many underestimate how much they will need to retire comfortably, so they don't save enough.

According to Fidelity, most people will need between 55% and 80% of their pre-retirement income to maintain their quality of life in retirement.

After considering Social Security benefits, Fidelity found that most retirees must generate 45% of their retirement income (before taxes) from their savings.

Reaching that goal requires saving 15% of your pre-retirement income every year between the ages of 25 to 67, based on Fidelity’s calculations.

If you don’t start saving until age 30, your savings rate increases to 18%.  If you defer saving until age 30, it becomes 23%.

To reach your retirement savings goals, Fidelity recommends:

• Using tax-advantaged retirement accounts like 401(k) plans and IRAs.  You will get a tax deduction when you contribute and defer taxes on your gains until you withdraw from your account.

• Increase your savings rate each year by 1%.  It adds up over time.

• Take additional risk by allocating more of your portfolio to stocks in the earlier stages of your career.  You may have to deal with stomach-churning volatility, but your expected returns will be higher over time.

• If you are over 50, familiarize yourself with “catch-up” contribution rules which permit you to save more before you reach your contribution limits.

Mistake #2: Failing to Diversify Investments

“Diversification” lowers your risk by investing in different asset classes like stocks, bonds, and cash.

A diversified portfolio includes not just these different asset classes but also is diversified within asset classes, so your portfolio is not overly concentrated in any one market sector (like technology stocks or growth stocks).

A well-diversified portfolio includes stocks from different “sectors, industries and countries.”

It may not be necessary to globally diversify your bond portfolio if it consists of Treasury Bills or Treasury Notes, guaranteed by the full faith and credit of the U.S. Government.

You can quickly diversify your portfolio by investing in suitable index or Exchange-traded funds.

Mistake #3: Taking Social Security Benefits Too Early

According to the Social Security Administration, your Social Security benefits vary based on when you elect to start receiving them.  While you can elect to retire and receive benefits as early as age 62, doing so can reduce your benefits in retirement by as much as 30%.

If you want to receive your highest benefits from Social Security, consider delaying retirement until you reach age 70.

Each situation is unique, and there may be legitimate reasons to take Social Security benefits early.  For example, if your health is poor and deteriorating, and you may not live until age 70, you’ll want to elect early benefits.

Mistake #4: Not Planning for Healthcare Costs

There’s a massive disconnect between the concern most Americans have about funding the cost of healthcare in retirement and planning for those costs.

According to a report from RBC Wealth Management, a 65-year-old couple retiring in 2021 may incur healthcare costs of a staggering $662,156.

Relying on Medicare to cover these costs is unwise.  It covers less than two-thirds of health care costs in retirement.

Over half of your Social Security benefit may be needed to fund your health care.

By some estimates, 70% of those age 65 will need some form of health care, costing an average of $105,850 for a private room in a nursing home, lasting an average of 2.5 years.

Unless you plan for these costs, your quality of life in retirement may be seriously compromised.

Mistake #5: Failing to Have a Retirement Income Plan

Finally, failing to have a retirement income plan is a common retirement mistake. Many people focus solely on saving for retirement and need to consider how they will generate income.

To avoid this mistake, consider developing a retirement income plan that includes a mix of guaranteed income (like annuities,  Social Security, and pensions) and gains from your investments, which should grow over time but will fluctuate subject to market conditions.

Ideally, your guaranteed income will fund your fixed expenses, and your growth income will pay for your discretionary expenses.

At Daner Wealth, we help our clients avoid planning mistakes and assist them in reaching their retirement goals.

A low-stress retirement requires significant planning. The absence of planning is why most Americans aren’t prepared for retirement. A recent survey found that 63.39% of those responding reported retirement savings between zero and $10,000. While not saving for retirement is the primary reason it is far from the promised 'golden years' for many Americans, there are other common mistakes you need to avoid.

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