Retirement is a period of life you'll need to carefully plan for. But the wrong moves could end up wrecking your senior years and leaving you uncomfortably cash-strapped. Here are a few ways you may be sabotaging your retirement without even realizing it.
1. Relying too heavily on Social Security
If you're an average earner, you can expect your Social Security benefits to replace about 40% of your pre-retirement income. But that's probably not enough for you to live on. Most seniors, in fact, are advised to plan on needing 70% to 80% of their former earnings to cover their expenses.
Of course, there's some wiggle room in that formula. If you intend to maintain a very frugal lifestyle in retirement, you might get away with living on just 50% or 60% of your former income. And on the flipside, if you're hoping to travel a lot in retirement and live it up, you may need more than 80% of your previous wages. But either way, Social Security alone probably won't cut it, so rather than assume that those benefits will pay the bulk of your bills as a senior, plan on having them cover a portion of your retirement costs -- and save enough to pay for the rest.
2. Investing too conservatively
Between Social Security and withdrawals from your retirement savings, you may, for the most part, be on a fixed income as a senior. The problem, however, is that inflation will make the general cost of living increasingly expensive as you go. That's why you need ample savings to ensure that you're able to keep up with those changes -- especially since Social Security has historically done a poor job of helping seniors maintain buying power as inflation rears its ugly head.
In fact, one mistake a lot of people make is investing their retirement savings too conservatively. While safer investments like bonds are appropriate in the years leading up to retirement, when you're younger, stocks are the way to go, because they allow for more substantial growth.
Imagine you fund a retirement plan with $300 a month over a 40-year period. If you go heavy on bonds during that time, your savings might generate a 4% average annual return, leaving you with an ending balance of $342,000. Now that's a nice chunk of cash -- but if you go heavy on stocks instead and replace that 4% return with a 7% return, you'll wind up with $719,000 to your name, all other things being equal. And that extra $377,000 could spell the difference between living comfortably during retirement or having to perpetually pinch pennies.
3. Underestimating your healthcare costs
Many people assume that healthcare will be affordable once they sign up for Medicare. But you may be surprised at the number of hidden costs you'll encounter once you're enrolled. In fact, some projections put total healthcare spending in retirement at a whopping $606,337 for the average healthy 65-year-old couple today. Ouch.
To avoid a cash crunch down the line, allocate funds for future medical expenses in the course of your savings. You can do so by padding your retirement plan, or by contributing to a health savings account, if you're eligible (you'll need to be enrolled in a high-deductible health insurance plan to qualify).
Don't get caught off-guard
As you can see, a few seemingly innocent mistakes could result in a world of financial stress once your senior years begin. So don't let that happen. Instead, have a realistic view of Social Security, invest your retirement savings appropriately, and read up on what healthcare is likely to cost. All of these moves will put you in a much better position to enjoy retirement rather than struggle throughout it.