5 Wrong Recommendations About Saving for Retirement
Retirement is something that affects us all.
It can be scary to think about a day when we will not work, when we are closer to the end of our lives than to the beginning.
But there is sound financial advice that can help you live the best lifestyle after you retire.
Below are five poor recommendations, or things not to do, when you reach retirement age.
You Can Make Saving for Retirement without a Retirement Budget
Did you know that statistically, you are more likely to increase your spending after you retire? Why is this? Maybe because you all of a sudden have more free time, time to do the things that you always wanted to do while you were working.
According to the Employee Benefit Research Institute, about fifty percent of retirees increase their spending just after retiring. This is why you will need to work hard to design a suitable budget for your new post-work life. Of course, you can be flexible with this budget—no one ever knows exactly how much they are going to spend each month. But you should have a figure in mind.
Of course, you can be flexible with this budget—no one ever knows exactly how much they are going to spend each month. But you should have a figure in mind.
Fortunately, two online sources (they are free!) can help you design a budget for after you retire.
The first tool that can help you budget for retirement is BlackRock’s Expense Worksheet. With this worksheet, you may enter 50 separate items, including medical bill costs, family care costs, household expenses, and money you want to set aside for travel.
Worksheets like this will help you visualize how much money you have, and how you can allocate your savings. Seeing where your money is going can be very helpful when sticking to your budget. And, as Walter Updegrave discusses, building a retirement budget is crucial for a successful retirement fund.
The second tool (also free) is available through Fidelity. They offer a worksheet as well, available in its Retirement Income Planning tool. With this tool, you will be able to determine which of your expenditures you cannot live without and which are less important.
Let Your Lifestyle Determine Your Withdrawal Rate
This is bad advice! Once you retire, you should begin to consider how much money you will need to cover your costs while also sustaining a lifestyle that you enjoy.
Of course, you want to find a balance so that you do not overextend yourself and find that you cannot financially sustain this lifestyle. To avoid this problem, you should pay close attention to how much you are withdrawing from your account.
Let’s presume that you would like your nest egg to last 30 years. According to RealDealRetirement.com, this means you would start with an initial withdrawal of 3 to 4 percent of your assets, and then you should adjust that amount every year according to the rate of inflation.
But remember that whatever rate you choose, you will also need to be flexible. We never know when a health risk can arise, and this risk is obviously much more likely the older you are.
If you have children, you may need to help them with an emergency or to pay for a wedding. It is a good rule when you are budgeting to always have some reserve money, or money that you can use for emergencies or sudden surprises.
Also, if you have money in stocks, you know how volatile the market can be. If your stock takes a sudden drop, you will need time to rebound financially.
Of course, if you have stock and the market does very well, you can always increase your expenditures.
Don’t Worry about Your Savings Until You Are Close to Retirement
This one seems like obvious bad advice, yet it is a rule that is followed too often. The sooner you begin thinking about retirement and saving for retirement, the better off you will be when you actually do retire.
Think of it this way: money is a cushion and the larger your cushion, i.e. the more money you have, the better off you will be should some disaster occur. To give you a clearer picture, here are some hypothetical scenarios. Say a 30-year-old earns $45,000 per year with annual raises of 2 percent. If he or she can save 15 percent of that income, this means that he or she will have earned an extra $330,000 by age 65.
This is huge! But you have to start early. You have to think about the end of your career as soon as you start it. Say this same person decided to wait until age 50 to begin saving. At a savings rate of 15 percent, this would add $90,000 over the last fifteen years of that person’s career.
This isn’t a small amount of money, but had he or she begun saving earlier, the chances that they are going to have an easy retirement would be much higher.
Go to Your Friends and Family for Investment Advice
This can be a hard one. We want to trust our family and friends above everyone else in our lives. And of course, in most cases, we should. But when it comes to financial advice you should consult a professional, someone who understands the market and the ins and outs of various tax laws.
Instead of taking advice from your parents or friends, talk instead to a certified financial planner and investment advisor who can talk you through your financial future. Also keep in mind that your loved ones do not know your financial background like a financial planner would. Having all of your financial information is a must for planning your retirement.
Give Back to Your Children
This is a tricky one. While it is generous to make payments to your adult children, you really need to think about your own financial future.
Supporting your adult children can put you in a tough spot financially, which I believe your children would not want for you.
Remember that as a retiree, you cannot replace your money. What you have is, in theory, all you will have, and you have to budget accordingly to make that money last.
Have a conversation with your children about your financial situation. Let them know that supporting them and don’t make saving for retirement now means that they might have to support you toward the end of your life.
Retirement can be daunting and difficult. But speaking with a financial planner and following sound advice will help relieve some of the frightening aspects of retirement.