A rock-solid retirement plan will put you on a path toward enjoying your senior years. But there are a lot of do's and don'ts when you sit down to come up with that plan. Be sure to avoid these five mistakes that can derail your retirement.
1. Don't wait to get started
Retirement is decades away, so there's no big rush to start saving for it, right?
Unfortunately, the longer you wait, the harder it becomes to meet your retirement goals. Even saving just a little bit of money each month in your 20s can become a lifeline in your 70s.
There are a few additional reasons you shouldn't wait. First, the more time you give your investments to grow, the more valuable they become. This is due to compounding, wherein the earnings on your investment start earning returns as well. Investing in your 20s could practically be the equivalent of investing twice as much as in your 30s or quadruple the amount in your 40s.
Second, it's difficult to predict the future. You may think you'll be in a better position to start saving a decade from now, but there's a chance you'll be wrong. Your future self will thank your current self for starting to save when you had the chance.
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2. Don't expect you'll keep working as long as you think you will
Working in retirement can have a lot of benefits, but expecting that you'll do so is a bad bet. Many things can prevent you from working into your late 60s. You could be laid off and unable to find new work or face health issues that prevent you from continuing your career. You never know what could happen.
It's better to plan to stop working or at least expect a decreased salary after age 65. Maybe that's conservative, but it'll ensure you have money if and when you need it.
3. Don't plan for an inheritance
If the bulk of your retirement plan revolves around inheriting money from a parent or loved one, you need to go back to the drawing board.
Even if you expect to receive an inheritance, you never know if it will end up being smaller than expected. Your parents have a longer retirement than they planned for, thus diminishing what they can pass down to you (or you may even retire before they're ready to bequeath). If a parent or sibling has ongoing health issues, that money meant for you may be needed for them.
By the time you realize an inheritance will fall short of what was planned or expected, it may already be too late to make up for it with savings.
4. Don't depend on Social Security
Despite all the warnings about cuts to Social Security, it's unlikely the program is going away. But don't make the mistake of thinking you'll receive enough in benefits to cover most of your expenses in retirement.
Social Security is likely to replace only a portion of your income. The average monthly retirement benefit check is about $1,800.
While you can increase your Social Security by earning a higher salary in your working career or delaying your benefits until age 70, it's designed to supplement your savings. Social Security should be thought of as a safety net if you fall short of your retirement savings goals.
5. Don't expect more than reasonable returns from your investments
The stock market is one of the best ways to invest your money and outpace inflation, but it's important to keep your expectations in check.
You may have heard the stock market goes up an average of 9% or 10% per year, and that's true. But when you adjust for inflation, the average compound return of the S&P 500 is closer to 6.5%. That's a good starting point for how much you can expect your spending power to grow through investing.
It's also important to keep in mind that stocks don't go up in a straight line every year. There's a lot of variance, and that can have a substantial impact on how much money you ultimately retire with.
Furthermore, consider that you won't be investing 100% in stocks your whole life. Even if you start out investing purely in stocks in your 20s, you'll likely want to rebalance your portfolio with more conservative assets as you reach your 50s and older. As such, plan for lower returns later in your career.
Make a plan and expect it to change
The best thing you can do when planning for retirement is make a plan with conservative assumptions that you can reasonably follow for the foreseeable future. As things change over time, revisit the plan and make any necessary adjustments.
It's a lot harder to predict what will happen 40 years from now than four years from now, and even that can still be a challenge. Update your retirement plan at regular intervals, and you can increase your chances of getting there with the money you need to enjoy it.
