BY: Daniel M. Savage
Just as there are seven deadly sins associated with spiritual teaching, there are seven that must be avoided as you prepare for retirement. Here they are:
1. Not saving enough money.
While some individuals, in fact, save enough, far too many do not. According to Vanguard’s “How America Saves 2016” report, the average worker deferred 6.8% of his or her earnings in 2015. The median percentage was 5.9% which means that half of American wage earners saved less than 5.9%. Here’s a shocking statistic: half of all baby boomers have saved less that $100,000, including 37% who have accumulated less than $50,000.
Let’s look at what saving 6% of earnings can do for a 25 year old starting from scratch who is paid every two weeks, earns $50,000 a year with 2% annual raises, experiences a 6% annual return for 40 years, and does not receive an employer match. At age 65, he or she will have accumulated $649,580.72 (contributions of $181,205.95 with the balance coming from investment returns).
Throw in an employer match of 4%, and the total amount accumulated grows to $1,082,634.53.
While there are no hard and fast rules for defining “enough," consider the following guidelines:
- Always defer enough to capture your employer’s full matching contribution.
- After reviewing your budget for expense reduction opportunities, save until it hurts.
- Revisit your deferral percentage annually or whenever you receive a raise.
- Consider deferring a portion of your bonus, if paid.
- Start deferring sooner than later.
2. Ignoring post-retirement expenses.
Many wage earners overly simplify retirement planning by focusing on a “magic” dollar threshold…rumored to be sufficient. In reality, there is an equally if not more important dimension: the level and management of post-retirement expenses. For example, $1 million may be sufficient for a frugal couple but woefully inadequate for another couple with ambitious lifestyle plans. A competent retirement planner can properly guide you through this process.
3. Outliving your money.
Americans are living longer than ever, often well into their eighties and nineties. While family medical history may offer useful insights about life expectancy, plan for your mid-nineties to be safe, or you may experience unpleasant changes to your lifestyle.
4. Healthcare costs.
More than any other factor, healthcare expenses can wreak havoc with an otherwise excellent retirement plan. While Medicare and various quality medi-gap and drug coverage policies generally address most needs, they will not be sufficient for catastrophic events…including long-term care needs. Hope for the best but plan for the worst by planning for rising medical costs…including long-term care.
5. Investing too conservatively.
Defining “too conservatively” is challenging under the best of circumstances, because risk tolerance is a key element of investing. However, being overly conservative can profoundly and adversely impact your nest egg, particularly if you’re overly conservative early in your accumulation phase. Using the “employer match” example in #1 above and reducing the investment return number to 4%, your retirement nest egg will decline to $671,895.09. Again, a competent retirement planner can be very helpful with this issue.
6. Depending on Social Security.
Believe it or not, many Americans wrongly assume that Social Security will be sufficient to fund an enjoyable retirement. Think again…especially if your benefit is $2,000 or less per month. The news gets even worse if you are in your fifties or younger. While no one knows what Congress will do, there just may be a benefit reduction in your future. Robust savings is the best way to help ensure a prosperous retirement lifestyle.
7. Retiring with debt.
Think of this as a financial kiss of death. One sure path to retirement failure is to retire with a large mortgage, car payments, and credit card debt. Referring back to #2 above, these are nearly always large ticket items that significantly impact cash flow. Retirement will be far easier and more enjoyable if you start working now on eliminating or nearly eliminating those obligations. For many individuals, doing so will easily increase their monthly free cash flows by $1,000 or more.
Any one of the above “deadly sins” will create problems. Two or more will almost guarantee a return to the ranks of the employed or a diminished lifestyle. It’s never too early to talk to your financial advisor about how to enjoy a great retirement.
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