Nearly all Americans share one goal: They want to be able to hang up their work coats after many years in the labor force and know that they're financially set for retirement. Unfortunately, this is a goal that's being reached by a depressingly low number of Americans.
According to a September survey from GoBankingRates of more than 7,000 adults across the U.S., 69% had less than $1,000 in their savings accounts, including 34% of respondents who had zero, zilch, nada! Just 15% of total respondents had $10,000 or more in their savings accounts, implying that few Americans have enough in their savings account to cover an emergency should one arise. If so few people are able to save enough to cover an emergency, you can only imagine how dismal the picture is for retirement savings.
Here's how easily your retirement could be derailed
However, what's just as worrisome is how easily those who have saved enough for retirement can be derailed. There are seemingly just as many concerns entering/during retirement as there are during your working years. Here are five somewhat common ways your retirement can easily be ruined, as well as how to avoid becoming a victim of a bad financial decision.
1. Investing too cautiously
One of the biggest concerns during retirement is that you'll enter it with complacency. Though you may have hit your retirement number, inflation stops for no one. If you stop investing for the future, you could find your purchasing power greatly reduced over time. As you age, there's a good chance that the goods and services you need (e.g., rent, food, medical care) are going to get more expensive with each passing year. This means you'll need to invest with the goal of keeping pace with or topping the national rate of inflation each and every year if you hope to at least maintain your purchasing power.
One of the more common mistakes that seniors make is to gravitate toward bank CDs and bonds because they're seen as safe. While these interest-bearing assets can and do generate near-guaranteed nominal returns, many could still be losing real money relative to the national inflation rate. The solution? Continue investing some of your nest egg in the stock market. While there's little denying that stocks are more volatile than bonds or bank CDs, the stock market also offers historically inflation-crushing returns of 7% per year, including dividend reinvestment. Investing in stocks with dividend income to boot could be the perfect formula to help grow your nest egg, or at least keep up with inflation, during retirement.
2. Taking Social Security at the wrong time
Another mistake that could easily ruin your retirement is filing for Social Security benefits at the wrong time (in many cases too early).
Your Social Security benefits increase by approximately 8% for each year that you hold off on claiming. If you wind up claiming benefits as soon as possible at age 62, you could end up taking a 25% to 30% haircut from what you would have received each month had you waited until your full retirement age. Similarly, waiting until age 70, the last age at which your benefits grow, could net you a 24% to 32% higher benefit than what you'd have received at your full retirement age.
An easy way to wreck you retirement is to take Social Security benefits early if you don't have much saved up for your golden years. If you plan to rely on Social Security income in retirement, you should, in theory, try your best to maximize your Social Security payout. This means waiting until age 70, or at least your full retirement age, before filing for benefits. If you have little saved for retirement but are a healthy individual, working a few years longer can make a huge difference in your eventual Social Security payout and your long-term financial stability.
3. Outliving your savings
According to a Wells Fargo/Gallup survey released in September 2014, 46% of Americans surveyed, including 36% of retirees and 50% of current workers (at the time), were worried that they would outlive their savings in retirement. This fear is once again a representation of the poor saving habits of Americans.
However, it's pretty easy for seniors to outlive their savings if they don't have a working budget in place during retirement that allows them to understand their cash flow. Some seniors who are entering retirement are completely unprepared for the drop in income when shifting from job-based wages to alternative channels of income, such as an IRA, 401(k), or Social Security income. Often times, these alternative channels of income are lower than what you received during your working years. If you don't have a working budget in place, you could wind up spending more of your nest egg than expected and outlive your savings.
The solution here is pretty simple: you need to have a retirement budget in place well before you retire. Having a well-crafted retirement budget in place should help you avoid dangerously overspending during your golden years, and formulating your budget years in advance can allow you to transition into your retirement budget slowly, instead of facing a substantial drop off in income between your last working month and your first month of retirement.
4. Entering retirement with debt
Another potential retirement crippler is debt.
According to the Federal Reserve's 2013 study, "Insights into the Financial Experiences of Older Adults," 60% of adults in their 60s and 40% of adults in their 70s owed money on their mortgages. The report does note that this isn't necessarily a sign of financial stress as some people simply prefer to pay off their home in installment payments over 15 or 30 years. But the other side of the coin could imply that seniors are playing a dangerous game by carrying a significant amount of debt into retirement when their income could presumably be lower on a monthly basis compared to when they were working.
Part of the solution to ensuring you aren't derailed by debt in retirement is to have a working budget in place to keep from overspending. The other half of the solution is to be a smart consumer during your working years. In other words, you should only be opening lines of credit in instances where it makes sense to do so. Avoiding department store credit cards, as an example, can go a long way to keeping your budget on track and ensuring you don't enter retirement with a backbreaking amount of seemingly unnecessary debt.
5. Lending money you'll eventually need
A final way your retirement can be easily ruined is by lending a good chunk of your nest egg to a close friend or family member.
It's only natural for us to want to help the people we love, be it by helping with a down payment on a home or perhaps providing tuition money for college. Unfortunately, doing so could wind up crippling your own retirement prospects in two ways.
To begin with, a younger friend or family member has time on their side and can borrow money via a loan and pay it back. If you're nearing retirement, or are retired, you can't borrow against your nest egg. The other problem is that it can severely hamper your ability to compound your nest egg. When you hand over cash to a loved one, you not only lose the money you've handed over, but the ability of that money to grow over time. If investments in the stock market grow at about 7% annually, $10,000 handed over at age 50 that would have otherwise been invested over the long-term could have been worth nearly $57,000 by age 80 based on Bankrate's return on investment calculator.
The solution is pretty straightforward: only hand out money to family and close friends if you've gone well above and beyond your retirement number. If you're still saving to reach your goal, you simply can't afford to put your family or friends above your own financial retirement goals.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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