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We'd all love to retire to a beach house and spend our non-working days taking walks through the sand.
To help turn that vision into reality, you’re probably contributing to a 401(k) or IRA, hoping for compound growth.
But preparing for retirement doesn’t stop at saving. There are a lot of moving parts that will factor into how you plan, and it’s easy to overlook them. Just ask these personal finance pros, who share some of the biggest mistakes they’ve seen people make.
Keeping Your Head in the Sand
"In speaking to thousands of pre-retirees each year, I see the impact of planning — and not planning — for retirement daily," says Chris Kowalik, a federal retirement expert at ProFeds. "I can say that one of the most prominent obstacles to saving adequately for retirement is the fact that it is easier to ignore retirement than to face it: Most people spend far more time planning a family vacation than they do planning for their financial future."
Regret, says Kowalik, is what he sees when people don't take action earlier in life. "Here's the reality: Not making a decision is a decision — it just doesn't yield the outcome you likely want."
His advice? Define success, and then figure out the path that will get you there. "If you have clearly defined goals," Kowalik says, "saving for retirement doesn't seem quite so scary."
Being Too Optimistic — or Pessimistic
According to Scott Vance, a financial planner for Trisuli Financial Advising in Raleigh, North Carolina, people have a hard time getting a realistic grasp on their financial situation. They either save too much or too little. "I have had clients who have no retirement savings, investments or pension and swear up and down that in six months when they turn 62, they’ll be able to retire, buy whatever toy they have been dreaming of, travel the world and live in glory — regardless of the fact that they will be living on Social Security, their home is mortgaged to the hilt and their business or job is not going to provide any real amount of retirement income."
Other clients, he says, insist they’ll have to keep working in retirement — that even with their giant nest egg, they can’t seem to accept that they’ll be able to stop working, or at least work a little less.
"I think a lot of times when you see these situations, it is tied to an emotional reason or something from deep in their history," Vance says. "So I try to get them to understand their situation by asking deeper questions."
Not Holding a Diversified Portfolio
Many employees have a significant portion of their retirement portfolio invested in their own company’s stock. But that's considered overexposure — and it's risky.
If this is you, take heed, says David Walters, CFP®, a portfolio manager at Palisades Hudson Financial Group in Portland, Oregon. "If you only own one stock, and something bad happens to that specific company, then the value of your retirement portfolio is going to take a big hit," says Walters. "It’s the same concept as putting all your eggs in one basket. To help keep investing risk in your portfolio in check, where possible, allocations to any single company should be minimized in favor of a well-diversified portfolio with exposure to many companies, industries and asset classes."
Forgetting About Taxes
People underestimate the impact of taxes on their retirement income because they simply don’t think about it, says Tracey Lawrence, retirement consultant and founder of Grand Family Planning LLC in Ringwood, New Jersey.
"They generally contribute to a traditional 401(k) at work, which means they don’t pay income tax on that money and it grows tax-deferred. But when they begin to take distributions, which they can do after age 59½, the IRS will tax them on whatever they take out at the regular rate of taxation. So if their tax rate is 25%, their 401(k) is only 75% as valuable as it seems."
Lawrence recommends putting a portion of after-tax income into tax-free retirement vehicles. "By paying tax on the money before it grows, it’s less painful — think of it as paying tax on the seeds rather than the harvest."
Assuming You’ll Be Able to Work Into Old Age
If we haven't saved enough, we can just work longer, right? We might be selling ourselves short.
Often Americans are living longer but not necessarily living better, says Robert R. Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania. "They may be forced to retire before they are ready because of their health or the health of a loved one, because of downsizing and mergers or because businesses fail," says Johnson. "What I tell clients is this: If possible, build in a margin of safety into your retirement plans so you can cover being forced to retire earlier than planned or living longer than the actuarial averages."
Not Factoring in Health Care as a Retirement Cost
Not planning for the cost of health care in retirement is a big mistake many make. One estimate by HealthView Services finds that couples retiring in 2015 may have to spend between $266,000 and $394,000 on health care.
"What I stress to my clients is the importance of understanding the three main factors that can impact their own costs: When do you plan on retiring? What is your health status? And how long do you think you may live?" says Ronn Yaish, a wealth advisor for Yaish Financial in Bergenfield, New Jersey.
Not Accounting for Long-Term Care
When you're young and healthy, it's easy to overlook what could happen to your health as you age.
"Unless someone you know has needed long-term care, you would be surprised by how much health care and nursing homes cost," says Patty Cathey, an investment advisor for Smart Retirement LLC in Denver. Her advice? Because Medicare and health insurance plans do not cover long-term care, consider long-term-care insurance. A typical policy pays for things like assisted living and services in the home.
It may feel early to think about these things, but you'll be glad later that you did, now.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.