If you’re thinking about your financial future, retirement planning is one aspect you can’t overlook. But retirement planning is one of the most difficult financial tasks, as it came with some issues. Your ability to save can be impacted by your salary, debt, expenses, etc. Plus, there is no one-size-fits-all approach to retirement.
To build the right plan, you need to avoid retirement myths and stop working at an optimal time to ensure you have enough savings. Failing to be proactive can result in stress and worry over your financial future.
Spending Too MuchIt’s never too early to start thinking about retirement. And one common mistake people make is spending too much money, whether before retirement or in their golden years. High spending can damage your retirement plans. If you’re older and on a fixed income, having high expenses can shrink your budget for other important areas, like living expenses. It can also mean the difference between being able to afford nice retirement vacations or not. Remember to make a budget that limits frivolous spending so you can put the money to work in other ways.
Not Taking Your Health Into AccountIt’s not easy to talk about, but considering your health is an important and often overlooked aspect of retirement. As we age, we become more susceptible to being unable to work due to our health. One way to protect against this is to invest in annuity contracts. Contributing to an annuity is a great way to receive fixed monthly payouts when you decide to retire. Many annuities also allow you to cash out in case of an emergency.
Failing to Diversify Your SavingsWhat if you think you’ve saved enough, but all of your retirement plans are based on a single type of saving? Failing to diversify is another financial mistake many people make.
Contributing Too Little to RetirementOne of the most obvious problems is not saving enough for retirement. However, it’s always helpful to be reminded to monitor how much you contribute to retirement. To maximize how much money you have when you retire, it’s key to save the right amount.
For example, starting with an initial investment of $5,000, a monthly contribution of $200 and a 3 percent interest rate will yield $126,317.31 after 30 years (compounded yearly). On the other hand, investing $10,000 initially and contributing $300 every month over the same period with the same interest will yield $195,544.12.
Starting Too LateThis is a big one on our list of retirement planning issues. On top of contributing too little, another major problem is starting too late. I can personally attest to this problem myself. In my 20s, I had difficulty holding down a job and saving my money. Now that I am older, I can only wish that I had started saving sooner. Luckily, many Millenials save money earlier than other generations.
By educating yourself and saving today rather than tomorrow, you’re setting yourself up to be financially secure well into your later years. Earlier I walked through some examples detailing how saving more can yield greater benefits in the future. But what if you saved for longer (meaning, started saving sooner)? If you invested $10,000 initially, contributed $300 every month, and only had a 3 percent interest rate over 40 years, you would have $304,064.91 when you retire. That’s an increase of over $100,000! Not bad!
Overestimating How Much You’ll Receive in RetirementIn retirement, your income is usually made up of two or three parts. The first part is Social Security, the second is a pension (if you have one), and the final part is your savings. Social Security is automatically deducted from your paychecks every time you get paid. The earliest you can start claiming Social Security is at 62. However, choosing to retire before the full retirement age will reduce your benefit by 30 percent.
Pensions are less common today, but typically they are a type of employer-funded benefit. Finally, there are personal savings, which are made up of money you have saved throughout your working years.