A retirement plan is vital if you want financial security as a senior. And you don't just need a plan, you need a good plan. And that means there are some mistakes you should avoid as you consider what your future will look like.
As you set money goals and figure out how you'll support yourself as a retiree, here are four things you definitely don't want to do during the process.
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1. Assume you'll work until your late 60s
Assuming you'll be able to keep working until late in life is something you should not do in retirement planning. Too many things could prevent that from happening, including the loss of employment opportunities later in life, health issues, or a need to stop working to take care of family.
If you anticipate working into your late 60s or even into your 70s, you'll be in a world of trouble if it turns out you have to retire at 62 or 63. You likely won't have enough money saved yet, since you based your goals on having many more years to invest. And you'll need to rely on your savings for longer since your paychecks will stop sooner than expected.
If your unplanned early retirement means you must claim Social Security ahead of your anticipated date, you'll also shrink your benefits since these get smaller if you claim them before your full retirement age.
Rather than counting on a paycheck coming in for a long time, assume you'll retire and claim Social Security at 62 and be financially ready for that.
If it turns out you can work, save for longer, and put off your benefits claim, you'll just end up with more money than you need. That's a much better problem to have than finding yourself broke after a forced early departure from the working world.
2. Neglect to take health expenses into account
Healthcare is a huge expense for many seniors, with Fidelity estimating last year that a typical male-female 65-year-old couple would need as much as $315,000 to cover out-of-pocket medical expenses in retirement.
With your retirement plan, you can't assume Medicare will cover all you need. A hefty additional sum should be dedicated to costs like co-pays, coinsurance costs, Medicare Advantage or Medigap premiums, and services Medicare doesn't cover.
If you're eligible for a health savings account (HSA), you might want to contribute to it each year for future medical expenses because you get great tax breaks with an HSA.
3. Expect too much from Social Security
You don't want to make the wrong assumptions about Social Security. Specifically, you can't anticipate your benefits will be enough to live on.
Social Security is intended to replace about 40% of pre-retirement income and to work in conjunction with a pension and savings. You can't control whether your employer offers you a pension (although you can look for a job with one). You do have direct control over whether you have enough saved to supplement your benefits.
Most experts advise replacing about 70% to 90% of pre-retirement income after leaving the workforce. Since Social Security will only take care of around 40%, be sure your savings goals leave you with enough to provide the rest.
4. Forget about the impact of inflation
Lastly, you can't forget about how inflation will affect the buying power of your retirement savings.
If you're looking to retire in 30 years and see that you'll have $1 million in the bank by the time you get there under your current savings plan, you might feel like you're all set. The problem is, $1 million in 2053 would be about the equivalent of $476,743 in today's dollars.
While that's still not a bad amount of money, you can't withdraw it too fast. If you follow the 4% rule and take out about 4% of that amount each year in retirement, you would have the buying power of around $19,069 in today's dollars each year.
This might not be enough to maintain your standard of living. So, be sure to think about your actual future buying power, not just how much money your retirement account will have in it.
By avoiding these mistakes in retirement planning, you can help ensure you have a comfortable future.
