4 Common Mistakes That Will Ruin Your Retirement Plans

Retirement planning is a complicated and ongoing process with many “moving pieces.” With so much to pay attention to, it is easy to neglect or omit things that can make or break your success. Here are four common mistakes that will ruin your retirement plans:

1. Forgetting to adjust for inflation
People frequently forget about inflation when calculating the costs of realizing their retirement goals. They think if they already have enough to divide by however long they think they will live, there’s no need to put money in the market at all. What they don’t realize is not only that their spending will not be consistent the whole time, but costs for goods and services will likely be much higher in 25 years than they are now. There are tools that can help you adjust for inflation, but a good financial advisor will have not only the tools, but the expertise to help you interpret the results and plan accordingly. Vanguard has a handy quick calculator that does this kind of calculation for you. You can find it by clicking here. 

2. Thinking your 401k is all you need
People often think a retirement account is what you’re supposed to put your money in to retire, but if all your money is in a 401k, you could face a huge tax bill when you start using your retirement funds. If you want to have tax planning options in retirement a diversification of tax qualified and unqualified accounts is helpful.

3. Thinking your spending will remain the same after you retire
People often wonder how their spending pattern will change once they retire. The Bureau of Labor Statistics has been collecting data on population expenditures since 1984. The patterns of spending over time do emerge.

Figure 1 is a synopsis of thirty years of BLS statistics, and shows how spending patterns changed over time, partitioned by household size. The purple line shows the household (HH) average pattern of size spending, and also indicates that the average household size diminished with time. The figure shows that the annual spending pattern for this group decreased from ages 45-54 to beyond age 75 from about $60,000 to just under $40,000.

[1] See the BLS website http://www.bls.gov/cex/csxstnd.htm#2004 and related sites for other years.

Figure 1 Spending Patterns by Cohort

The one person HH annual spending held constant from age 45 through 65, and then decreased about 15% through age 75. The two person HH annual spending increased from age 45 through 55, was constant for ten years, and then decreased.

While planning for retirement from a financial standpoint, people tend not to plan what they will actually do in retirement until it’s time to do it. One line of reasoning goes: retirees suddenly have a lot more time, so they spend more of it – and therefore, more money – on things they enjoy, like travel, hobbies, and grandchildren. And while you may spend less on pleasure activities as you get older, it is very rare to avoid spending more with each passing year on healthcare.

4. Failing to allow for enough for healthcare
There are two primary reasons people do this: they neglect to plan for illnesses, especially those requiring long-term care, and they make incorrect assumptions about how long they will live. Many people make the mistake of thinking they will die relatively close to the age of life expectancy, but as medicine and technology improve every year, the average life expectancy goes up. If you live longer than your plans allow for, you risk of running out of money and being forced to apply for Medicaid, which can seriously limit the amount and quality of care you can receive. Further, roughly half of the population will die before achieving the average life expectancy, and roughly the other half will die after achieving it.

Your “golden years” can be one of the most rewarding seasons of life if you have planned well, and a time of stress and uncertainty if you haven’t. An experienced financial advisor can help you take a lot of the guess work out of planning and help you make sure you can retire on time and have the funds to enjoy it.

-Harold Sasnowitz-