By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement PlansPrint This Post
As we enter the bewitching month of October, it’s natural for thoughts to shift to the beautiful fall foliage and the enjoyment of Halloween, when it’s fun to indulge in scary activities. However, for those that are planning for and nearing retirement, making key mistakes in the retirement planning process can lead to some negative and scary outcomes – and not the fun kind! Ultimately, an effective retirement planning strategy is based on having clear goals and a plan for accumulating the assets and income stream necessary to meet those goals. But on the way to achieving all of this, there are some common missteps that can lead to disastrous and unintended consequences, including:
Not having a defined savings strategy
A common misconception for many individuals closing in on retirement age is that it’s too late to start an effective retirement planning strategy. Fortunately, it’s never too late to build good financial and savings habits. Every little bit helps, and with the benefit of compound interest and the tax advantages available with most retirement accounts, i.e., potential tax deductions, tax deferred growth, etc. even small levels of contributions can accumulate into sizable nest eggs sooner than you think. Start with a realistic savings goal and budget your spending to help stay on track.
Not taking full advantage of employer-sponsored retirement plans
While developing consistent savings habits is always helpful, don’t forget to take advantage of an employer-sponsored retirement plan, such as a 401(k) or 403(b) plan, if you’re fortunate enough to be covered by one. Those with access to plans like this should consider maximizing salary deferrals and utilizing key plan provisions such as employer matching, catch-up contributions for employees age 50 and older, and Roth deferral options. Leveraging these types of plan features can help supercharge progress toward your retirement goals.
Forgetting to consider the impact of health care cost
If there’s anything that scares people more than running out of money in retirement, it’s the prospect of suffering a prolonged physical illness or health crisis during retirement. Health care costs can erode spending power and economic security for many retirees, and they pose one of the most serious risks to retirement security. Data suggests that the average couple will spend $285,000 on healthcare in retirement – and potentially more if there is need for significant long-term care.* Accounting for this contingency is an important consideration when creating your retirement planning strategy and thinking about your retirement goals and income needs.
Not Having a Plan
As the saying goes, “failing to plan is planning to fail,” and this rings particularly true with financial and retirement planning. The process of creating a plan requires a discussion of retirement goals and the key factors that could impact those goals, i.e., monthly income needs, cost of healthcare, caring for aging parents, kid’s college expenses, etc. Once you’ve created a plan, remember to review the assumptions periodically to ensure your assumptions remain valid, especially given the constantly shifting markets and regulatory environment. These measures will ultimately lead to a more refined retirement planning strategy and greater confidence for success.
Despite the scary unknowns and uncertainties with retirement planning, having a comprehensive plan – while eliminating the pitfalls that can derail that plan – can lead you to a successful retirement planning outcome and hopefully a more enjoyable Halloween season. Contact your financial advisor for help or questions with initiating a retirement planning process.
Benjamin F. Edwards does not provide tax advice; therefore, it is also important to consult with your tax professional for additional guidance tailored to your specific situation.
*Fidelity “Heath Care Price Check”, https://s2.q4cdn.com/997146844/files/doc_news/archive/b6f07a26-3aa9-4a98-af00-b1b783cfd552.pdf. Page 1.