A steep drop in stock prices certainly doesn’t help, but basic lapses in retirement planning actually represent a much bigger danger to your retirement security. So if you want to have a comfortable and secure retirement, be sure to avoid these four major planning blunders:
Blunder No. 1: No Plan B
In an ideal world, you’d start contributing to 401(k)s and other accounts in your 20s, stick to that savings regimen and have a hefty nest egg by retirement age. In the real world, things don’t always work out so neatly, which is why many people enter the later stages of their career well short of the savings they need to retire. That’s why it’s crucial to have a back-up plan.
An all-out savings effort in the home stretch to retirement should definitely be one contingency.
For example, a 50-year-old with nothing saved who earns $80,000 a year and gets 2 percent annual raises could accumulate a nest egg of nearly $150,000 by putting away 10 percent of salary until age 65, assuming a 7 percent annual return. Boost that savings rate to 15 percent — which is the target many pros recommend over an entire career — and the savings balance jumps to almost $220,000. Pull out the stops and save 20 percent annually, and our 50-year-old can go from zero to more than $290,000 in just 15 years.
Granted, even this effort can’t make up for a lifetime of not saving. But you can certainly accumulate enough in 15 years — or even five or 10 — to appreciably improve your retirement standard of living.
Other things to consider when creating your Plan B: working a few extra years to save more and allow account balances to grow; strategies for maximizing Social Security benefits; tapping the equity in your home by downsizing, taking out a reverse mortgage (or both); and perhaps even relocating to a city or town with a lower cost of living.
Blunder No. 2: Investing by the Seat of Your Pants
With all the attention the financial press gives to the market’s ups and downs, it’s easy to equate smart investing with good timing — i.e., knowing when to jump out of stocks and into bonds or predicting which type of investment is about to skyrocket and which is ready to nosedive.
But let’s be real: Market meltdowns take most investors by surprise, as stocks’ 37 percent loss in 2008 did.
And even if you’re savvy enough to get out before a meltdown, fear of getting hit with further declines makes it all-too-easy to miss the first sharp rebound that eventually follows a collapse. For example, stock prices jumped 70 percent in 12 months a year after hitting bottom in March 2009.
A better strategy: Settle on a diversified mix of stocks and bonds that makes sense given your risk tolerance and how long you plan to keep your money invested. Then, generally stick to it except for occasional rebalancing.
This approach is particularly important as you near the end of your career and enter retirement, since you’ve got to balance two competing goals: growing your nest egg while simultaneously protecting it from unacceptable losses.
Blunder No. 3: No Strategy to Turn Savings Into Income
Tilting your retirement portfolio toward bonds and dividend stocks is not a retirement income plan. Indeed, by focusing too heavily on income-oriented investments you could actually put your portfolio and your retirement security at risk.
You’re better off developing an income plan that allows you to maintain a diversified portfolio while also taking full advantage of the other retirement resources at your disposal.
Start by getting a handle on estimated costs by filling out a retirement expenses worksheet. Next, see how much of those expenses you can cover from guaranteed sources of income, such as pensions and Social Security. If you think you’d like more assured income, consider an immediate annuity.
You can then rev up a good retirement income calculator to see how much of the remainder of your expenses you can reasonably expect to cover with draws from a diversified portfolio of stocks and bonds. The aim is to keep draws low enough so you don’t run through your nest egg too soon, but high enough to provide sufficient spending cash (especially early in retirement, when you’ll be able to enjoy yourself the most).
Blunder No. 4: Failing to Chart a Post-Career Course
It would be a shame to get the financial side of retirement right, but feel unhappy or unfulfilled after leaving your job. You can avoid that unwelcome situation by doing a little “lifestyle planning.”
The basic idea: to think seriously about how you’ll fill the hours when you no longer have a job or contacts with work colleagues to soak up much of your time.
Among the things that can lead to a more meaningful and satisfying retirement: cultivating a circle of friends and maintaining ties with family members; keeping physically fit and mentally alert and, staying active and engaged through work or volunteering.
The Ready-2-Retire tool can help you think more seriously about these issues, as can attending a pre-retirement workshop like the ones offered at the Osher Lifelong Learning Institute at the University of North Carolina-Asheville.
Clearly, there are plenty of other retirement planning mistakes you can make. But if you avoid these four blunders, you’ll dramatically increase your chances of being able to have a financially secure and emotionally satisfying post-career life.
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