Biggest Retirement Planning Mistakes

It wasn’t so very long ago that retirement was treated as an afterthought for people who worked for 40 years, collected their pensions and Social Security, and lived a few years in leisure. There really wasn’t a need for retirement planning per se. In fact, retirement planning, as we currently know it, didn’t come into being until the 1980s or 1990s when life expectancies begin to expand. Today, with rising retirement costs, longer life spans, and the need to rely almost exclusively on one’s own assets for income, there is little margin for error in planning for retirement. When we’re talking about securing a comfortable income that needs to last as many as 25 or 30 years, mistakes made early on can be magnified to tragic proportions. It becoming increasing important to avoid the biggest retirement planning mistakes.

Retirement Planning Mistake #1: Not setting clear, meaningful, realistic goals

Everyone understands that they need a target so they know where and how far to aim. It’s a simple exercise to set a target date for retirement and attach an income goal. The problem for many people, is that the goal is just a number and the time horizon seems boundless, meaning they think there’s plenty of time. Without a clear vision of what you want your retirement to look like and then translating your vision into very specific goals and benchmarks, you may find it difficult to muster the motivation or sense of urgency to adhere to a savings plan. If it’s not a priority, it’s likely to be procrastinated. Then the cost of your retirement goals increase.

Retirement Planning Mistake #2: Underestimating retirement costs

The cost of living in retirement has been steadily rising for decades due, in part, to increasing life spans, as well as general rising prices. Most people think that their expenses will actually go down during retirement. But, when you factor in rising health costs, the possibility of caring for aging parents, the possibility of subsidizing struggling children, the possibility of carrying a mortgage into retirement, and the probability of requiring some kind of long term care assistance, your retirement living costs may actually be higher than your working years.

Because we are living a lot longer than previous generations, the cost to stay healthy for a lot longer will consume a big portion of our income and assets. And, while the government has laid down a safety net of sorts with Medicare, which is likely to change for future beneficiaries, it doesn’t go far enough to protect us from critical or long term illnesses.

Retirement Planning Mistake #3: Trying to manage investment performance rather than risk

Sometimes it takes people a while before they figure out that they have absolutely no control over investment performance. No one can predict the future movements of the markets or interest rates. This fixation on investment returns detracts from what investors should be focused on, and that is managing their risks. Why? Because risks are certain, and because risks can be managed. For example, we know that inflation will rise. And, we know that interest rates will rise, and they will fall. You can also say with absolute certainty that the stock market will rise, and it will fall. We can’t be certain of the timing or the duration, but all things economic move in cycles. The newest risk that retirees face today is also fairly certain, and that is longevity risk, or the risk of outliving one’s income. When you combine the risk of longevity with the risk of inflation and the risk of declining markets, you have a compounded risk of dramatic proportions. But all of these risks can be managed and mitigated to reduce their potential impact on your financial future.

The key is to own non-correlating assets and apply certain investments as counterweights to the risks inherent in other investments. For instance, everyone needs to own growth investments such stocks. Because there is a risk of stock prices declining, you should also own investments that move counter to stocks, such as bonds. Also, both stocks and bonds can perform poorly during times of inflation, so we can counter that risk with a portion of our assets invested in gold or real estate. And, because the values of the various assets values will change over time, it is important to keep the counter weights balanced so that any one type of risk is not overly exposed. With this approach, the returns on your overall portfolio will be much more stable and more consistent, which is the absolute key to wealth accumulation.

Retirement Planning Mistake #4: Not knowing where you are in relation to your goal

One only has to look back on the last decade to be reminded that the economy and the markets can change rapidly and that people’s circumstances can also evolve quickly. It is important to think of your retirement plan as a living organism that responds to its environment. And what evolves may not look anything like what you originally envisioned. But, if you take frequent snapshots, you will be able to make the small adjustments needed to keep it on track to your goals. Many people simply continue to save, which is good, but the trajectory of your retirement account can be easily thrown off track if you are not monitoring its progress each year.

Your retirement plan will need to be adjusted to reflect your own evolving needs, priorities, risk tolerance and investment preferences. When done properly with regularity, the adjustments usually amount to minor tweaks. With a clear vision and specific goals you’ll always know where the target is and how close you are.