Planning for retirement is an important part of personal finance. Money isn’t going to magically come crashing down from the sky, showering us with financial security in our old age. Rather, it’s up to us to make this happen.
This is why it’s important to make good decisions, while avoiding retirement planning mistakes. When I think of my own big financial motivaton, it’s easy to take seriously the need to plan for retirement. Nobody wants to end up old and stressed about money!
Along those lines, a recent article on Moneyland caught my eye. It discusses major mistakes people make in planning for retirement, and shares seven. Below are the ones they’ve mentioned, along with my own commentary and thoughts on each.
- Assuming you will have control over when you quit. I agree with this one wholeheartedly. Most people don’t factor in unforeseen circumstances, or other negatives that just happen whether or not we want them to happen. I was once told second hand, years ago, about a guy who worked a company for a long time, like almost 30 years. A year before he was to quit and get full retirement benefits, they got rid of him. He never saw it coming and was crushed. But hey, they saved themselves some money, right? Or, a person could get sick and be unable to work – I think many of us have seen this happen to people. Bottom line is that things happen.
- Ignoring the tax impact of distributions. The article mentions that almost half of workplace retirement participants cash out and deal with penalties. Are you kidding me? This speaks to the value of financial education, and the need to understand how to grow net worth.
- Not saving enough for medical costs. Totally agree. I wonder if you agree with me that the average person, when younger, just doesn’t give enough thought to the reality that while they might be healthy now, they will likely have problems when older no matter what their best intentions are. Things break down when we get older, don’t think that eating very healthy, regular exercise, etc will be enough to prevent all problems. Thinking about this reality, along with how high out of pocket costs can be, makes it paramount to save for medical costs that are far greater than anything you’re spending today.
- Failing to lock up lifetime income. I do agree that regular cash flow is very helpful, but am simply not sure that an immediate fixed annuity is a panacea, and certainly don’t expect that most of us should be counting on social security. The latter is especially true the longer you have until you actually retire. Best to save, save, and save some more.
- Retiring too soon. This goes hand in hand with the next point on underestimating longevity. Aside from social security income or pension (if you’re lucky enough to have one) concerns, when one drops out of the workforce when older, it can be tougher to get back in if needed.
- Underestimating longevity. If one outlives his or her money, there’s a positive involved: you’re living longer! Wouldn’t that be a good thing? Maybe it’s best to reframe thinking here, and think positively that we’ll each live a long time, but negatively about our ability to work in our older years. In other words, there could be many years where we’ll be alive but unable to work.
- Drawing down retirement savings too quickly. This is where financial planning, relatively basic math, and some common sense can help a lot. You don’t want to risk running out of money, which means we must continue to discern wants and needs in retirement.
Personally, I’m a long way from retirement. But I try to keep in mind that I’m working for myself today, and the needs of the “future me” of 30 years from now. When that so-called future version of ourselves is older, creaky, has less energy, is less employable, and might not be able to work – we’ll be thankful for the savings that took place when much younger.
My Questions for You
Have you given thought to any of these 7 mistakes? How do your views align with mine on this topic?
Have you seen others make these types of mistakes?
Do you have any additional ones to add?