What you can do to circumvent them
Most people look forward to retirement. You’ve worked long and hard, and now you want to relax and enjoy your family, friends, and hobbies. Retirement can be a beautiful thing, but to truly enjoy your retirement, you’ll need to have a proper income to do so. Saving for retirement can never begin too soon, but there are some potential pitfalls when it comes to funding your retirement. We’ve collected the five most common retirement funding mistakes, so you can avoid them.
Underestimating Age
According to a recent study, a married couple has a 60% chance of having one spouse live to 90 years of age. That means, if the average couple retires at 65, they should be planning for at least 25 years of retirement, but that is not the case for most people. Many people greatly underestimate how long they will live, and thus underestimate how much money they will need for their retirement. The best way to circumvent this issue is to use retirement calculators to estimate the amount of money that should be accumulated to help ensure you do not run out of money in retirement.
Healthcare Costs
When we were younger, we most likely didn’t think much about healthcare costs. For most young and middle-aged people, healthcare costs are so low that they aren’t a concern. Maybe you visit the doctor once every few months for a checkup, or you only utilize urgent care when you can’t kick a bad cold, but as you age, health care costs tend to skyrocket. Remember that even if you have health insurance, it may not cover the cost of long-term care. To avoid the issue, it might be a good idea to set money aside in a health savings account. These accounts are savings accounts that can only be accessed for health-related needs and treatments.
Inflation
Did you know that over the last 25 years the consumer price index has increased by 50%? While that number may seem staggering, it’s considered tame by economists. That means, your money is not likely to go as far as you think, and your purchasing power is likely to be less than you expect when you retire. The best way to avoid this problem is to speak with a financial planner who can take inflation into account when crunching the numbers. They will be able to tell you how much you ideally will need in your retirement. Remember, however, that this number is still just an estimate, as no one knows for sure what will happen with inflation and tax rates.
Drawing on your Capital
Timing your withdrawals from accounts is a crucial factor in the health of your portfolio. You never want to withdraw funds before you need them, or before your account has matured. There are often penalties associated with early withdrawals, and you will be taxed on that income, as well. You also do not want to withdraw funds during a market low. Speak with a financial advisor and discuss when drawing on your accounts is most beneficial.
Market Volatility
Investment accounts are often tied to the stock market, which can be rather volatile. You will need to guess at market volatility if you plan on keeping your portfolio on a single track. This is never advisable, as a bad swing in the market can significantly reduce your funds. To avoid this problem, diversify your portfolio with low and moderate risk assets to protect against market swings.
Even if it feels that retirement is a very long way off, it is never too early to start planning. The more prepared you are, the more you will be able to enjoy retirement once you get there.
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