Retirement planning: Love it or hate it, we all need to do it. And no matter what your ideal retirement looks like, you won't be able to get there without some advance thinking. You may have tinkered with your portfolio, tried one of the many online calculators to see how much money you'll need, or even imagined yourself living in a smaller house or apartment.
Unfortunately, even if you've done all these things, you're probably still making one of these three major retirement planning mistakes.
1. A lack of contingency planning
Do you have a plan A and nothing else?
If you don't have any contingency plans in place for your retirement, you're doing yourself a huge disservice. Don't believe me? Ask all the people who were originally planning to retire in 2008. Any number of things can happen between now and your last day of work, so make sure you aren't caught completely off guard.
For example, what would you do if:
- The market cratered in the years leading up to your retirement date?
- You had a major health crisis or other unexpected expense that forced you to draw down your savings?
- Your defined pension didn't pay out as planned?
- You decided you want to move to Paris but couldn't afford the cost of living there?
These situations can be scary and stressful, and they can put a major strain on your retirement finances. The key is to minimize the potential damage by having some idea of what you'd do in such situations. In your retirement planning, keep your mind open to different possibilities so you can adapt accordingly.
2. Assuming your good health will last forever
Even if you're as healthy as a horse now, you won't always be so lucky.
It's an unpleasant subject, but it's a reality we must all face: A health crisis or even a general decline could come at any time. And unfortunately, poor health is extremely costly. Healthcare expenses are rising, and it's impossible to predict how much healthcare we'll need in the future. To give you an idea, the median cost of lifetime healthcare spending for a man who retired in 2010 is expected to be $65,000. For a man retiring in 2020, it's expected to be almost $110,000. Remember, that's the median, so for you it could be a whole lot higher.
This means you need to be aware of your health and the possibility that you'll need a significant amount of money in late retirement to make your life easier and more comfortable. Plan to have a fair amount of padding in your retirement accounts toward the end of your retirement. Your spending over your last two to three decades will almost certainly not be linear. Plan to take as little as you can in the early years so that you have the resources you may need in the later years. You may also want to consider buying long-term care insurance, which helps offset higher costs in the event of injury, illness, or decline. Generally speaking, the younger you are when you purchase it, the better rates and benefits you can get -- just be aware that those premiums can vary widely over time.
Lastly, you can mitigate the risk of high healthcare expenses by taking care of yourself. Every poor health habit you have builds on itself, so don't wait to start eating right, exercising, getting enough sleep, and minimizing stress.
3. Turning a blind eye to retirement planning
Similar to a lack of contingency planning is the "head in the sand" method of retirement planning -- that is, ignoring the subject altogether because it seems intimidating.
No one can fault you for falling into this bad financial habit. After all, retirement planning is challenging. Honestly, how is anyone supposed to accurately forecast 25-plus years of living expenses and amass the appropriate amount of money to get there?
However, you need to acknowledge from the outset that you will not get it 100% right. You will make mistakes, and you will have to adapt in the moment. The big picture will always be petrifying, so slow down and think smaller. Focus on what you can do and what you can manage.
Start by simply saving as aggressively as you can. Sign up for your employer-provided 401(k) or open an IRA, and then automate your contributions to your retirement accounts. This will make it easier for you to maximize your savings and take full advantage of the great benefits these accounts offer. The actual amount you need to save is dependent on a whole host of factors, including your age and your income and spending levels, but if you're feeling intimidated by those big-picture numbers, then focus on the little ones instead, e.g., the monthly amount that you can afford to save and invest.
This may seem like a small start, but over time it can lead to a comfortable and financially secure retirement.