Source: Social Security Administration.
People look forward to retirement throughout their careers. Yet workers often don't plan appropriately for their long-awaited retirement years, and the result can be devastating both financially and emotionally.
In order to help you see some of the warning signs of potential future problems in retirement, we've identified two common retirement mistakes that people make in planning for their lives after work. By being aware of these mistakes, you can put yourself in a better position to avoid them, and their consequences, in your planning.
Mistake 1: Unrealistic expectations of life after work
John Maxfield: Earlier this year, the Federal Reserve commissioned a study on the economic well-being of U.S. households. It looked at a number of things, but retirement was one of its main focuses.
Among other issues, only 11% of respondents who are not currently retired said they have given "a lot" of thought to financial planning for their retirement, and 25% have given "none at all."
One reason for this, I believe, is that many people have unrealistic expectations of retirement. Somewhere along the way, it hasn't been sufficiently communicated that society has moved from defined-benefit pension plans offered by employers to self-funded plans that shift the onus onto the individual to prepare for life after work.
There are any number of statistics that bear this out. For instance, the same study found that 35% of respondents between the ages of 18 and 29 planned to "work full time until I retire, then stop working altogether." Meanwhile, only 15% of people over the age of 60 were equally optimistic on that point.
These unrealistic expectations remove the incentive to plan ahead, leaving an uncomfortable share of Americans with no money saved for retirement.
The net result is that many retirees look to Social Security for the lion's share of income even though the program is intended to provide only supplemental support. "Among elderly Social Security beneficiaries, 22% of married couples and about 47% of unmarried persons rely on Social Security for 90% or more of their income," reports the Social Security Administration.
The way to turn this around, of course, is to save more throughout your life -- for an insightful take on how to do so, click here. And by investing your savings, particularly early in life, you'll be able to exploit the law of compound returns, which is the principal force that has led to the extraordinary wealth of investors like Warren Buffett and his partner Charlie Munger.
Mistake 2: Carrying debt into retirement
Dan Caplinger: Debt always puts stress on your financial life. But after you retire, debt has the potential to become devastating, because you have much less flexibility to handle your debt after you stop working.
Unfortunately, recent trends have seen more Americans of retirement age carrying larger amounts of debt into their golden years. According to a recent study by the Consumer Financial Protection Bureau looking at the most recently available data from 2011, 30% of homeowners aged 65 or older had mortgage debt. For those 75 or older, the rate was 21% -- more than two-and-a-half times the percentage that had mortgages outstanding in 2001. The typical amount of debt soared over that time frame as well, rising more than 80% to nearly $79,000.
Image courtesy of Akaisha and Billy Kaderli.
However, as much as mortgage debt can be a problem, what's even more troubling is that debt levels from credit cards, student loans, and other consumer credit are also on the rise among older Americans. Selling your home can usually get a mortgage paid off as a last resort, but trying to pay down high-interest credit cards can be a huge drain on fixed pension or Social Security income, and the fact that student loans generally aren't dischargeable in bankruptcy greatly reduces a retiree's options even in worst-case scenarios. The Institute for Financial Literacy found that those aged 55 or older have made up a larger percentage of overall bankruptcy filings in recent years, clearly showing the strain that retiree and near-retiree finances are under right now.
The tragedy of retiree debt is that it's much tougher to take steps to eliminate debt once you've already retired. The best time to handle debt is toward the end of your career, when you ideally have your highest-earning years and when those who have families start to see the financial obligations to their children decline. If you can get on a glide path to eliminate your debt by the time you retire, you'll be in much better shape to enjoy your retirement without financial stress.
