We're all told about the importance of planning for retirement, but sometimes, we do it wrong. These mistakes in the course of your planning could leave you seriously cash-strapped once your senior years roll around.
1. Underestimating how much replacement income you'll need
During your working years, you get used to living on a certain salary. Once you retire, you'll probably live on less -- but how much less can you get away with?
A lot of people mistakenly think they'll get by on half of their former income, but your living costs may not drop all that drastically once your career comes to an end. Even if you manage to pay off your mortgage in time for retirement and are able to shrink your transportation costs by virtue of not having to commute, that still won't necessarily take you down to 50% of your former spending.
A better bet is to plan on needing roughly 70% to 80% of your former earnings once you retire. If you're willing to live an extremely frugal lifestyle, you may get away with less, but if you aim for that 70% to 80% replacement-income target, you'll be less likely to encounter financial difficulties during retirement.
2. Overestimating your Social Security benefits
Many people assume that once they retire, Social Security will pay them enough money to live on. But actually, the average recipient today collects a little more than $1,500 a month, which amount to $18,000 and change in annual income. Furthermore, because Social Security is facing a financial shortfall in the coming years, benefit cuts may be on the table, which would leave you with even less income to look forward to.
That's why it's so important to save for retirement on your own rather than look to Social Security as your primary income source. If you're already heading toward the tail end of your career and don't have much savings, start playing catch-up and plan on delaying retirement a bit. Otherwise, you might really end up in a cash crunch once you stop working.
3. Not reading up on healthcare costs
While some of your living costs may go down in retirement, healthcare is the one expense that's likely to go up, and having a good estimate of what you'll spend can help you plan and save accordingly. Of course, the amount you'll end up spending on medical care will hinge largely on your health and lifestyle, but as a general rule, the average healthy 65-year-old couple retiring this year can expect to spend $606,337 on healthcare during retirement, according to HealthView Services.
To be fair, there are lower estimates out there. Fidelity, for example, estimates that the typical 65-year-old couple retiring this year will only spend $295,000 on healthcare in retirement ("only" being a relative term). A good bet, therefore, may be to plan on spending somewhere in the middle and save for that expense appropriately.
In addition to padding your retirement savings to cover your future healthcare needs, see if you're eligible to contribute to a health savings account. Not everyone is, and to qualify, you must be enrolled in a high-deductible health insurance plan. But if your plan is compatible with a health savings account, you'll enjoy a number of tax benefits and have a dedicated source of medical-expense funds at the ready once you retire.
Planning ahead for retirement is the responsible thing to do, but make sure you're doing it right. Avoid the above mistakes, and you'll be less likely to run into financial trouble once your time in the workforce comes to an end.