It's a sad financial retirement planning fact that most people won't retire rich. Most people are pretty sure of that fact too. The 2008 Retirement Confidence Survey� performed by the Employee Benefit Research Institute showed that only 18% of you out there are confident that you'll have enough money for a financially secure retirement. The real tragedy is that for many people the dream was well within their grasp and they screwed it all up.It only takes a few mistakes throughout your working life to kill any chances you may have of retiring wealthy. Heck, you can ensure that you'll be asking “Would you like fries with that?” if you're not careful. With that in mind I'm going to reveal 10 of the most common retirement financial planning mistakes that can keep you from retiring wealthy, and may even make sure you see a whole lot more of your grandkids; every Friday from 3-11 at the deep fryer.
Retirement Financial Planning Mistake #10 is relying on Social Security to fund your retirement. If you're under 35, it may not even be around when you retire, and for the rest of you it won't provide a very high standard of living, even if it does stick around. Your maximum Social Security monthly benefit if you retire this month is only $2,030 for a single person and $3,027 if you're a married couple.
While this does rise over time, it's not too much unless you have virtually zero expenses. Consider that if you own your home, property taxes will rise, especially if your area experiences dramatic real estate appreciation. You could easily find yourself in a position where your property taxes chew up nearly all your monthly Social Security income.
If you're covered under the railroad retirement act you'll fare much better. For those of you that think social security is such a fantastic retirement vehicle (Mom, you know who I'm talking about) you should take a gander at the plan that railroad industry employees got out of Congress. It was first enacted in 1934, then redone in 1935 when the Supreme Court found the first version unconstitutional. The version of the act we have now has been with us since 1974.
In case you're unaware what good lobbying can accomplish, the railroad union talked Congress into exempting railroad employees from the Social Security system. They knew a bad deal when they saw one, I suppose. They basically got a plan to replace social security, except that it delivers greater returns to participants. In addition there is a second tier that delivers benefits according to years of railroad industry service. The upshot of the whole thing is that, while a Social Security beneficiary retiring this month stands to receive only $2,030, a railroad employee retiring this month will get almost double; $3,959. Put that in your retirement planning pipe and smoke it!
Retirement Financial Planning Mistake #9 is never financially educating yourself. It will be hard to understand everything there is to know about finances and your money. Indeed, that's why there are professionals. You should know the basics of personal finance, however. That way you'll know what questions to ask, what terms mean and when things just don't pass the smell test. You'll also be in a better position when it comes to voting and understanding the candidates position's on financially related issues, as the politicians who make their way into office can have a huge impact on your financial future.
Retirement Financial Planning Mistake #8 is not considering retirement benefits when choosing your employer. This can happen when you're young and free, because hey, retirement's a long way off. Thinking like that will make sure that it's a long way off, you knucklehead!
Retirement Financial Planning Mistake #7 is putting all your eggs in the company stock retirement plan basket. I've said this one before, but you're relying on your company for both your primary source of income and retirement funding, and that could easily lead to trouble. Several well publicized corporate debacles, such as Enron, have illustrated the fallacy of this approach. While stories are rampant of Home Depot and Wal-Mart cashiers retiring wealthy due to their company retirement stock plans, for every one of those there are many others who paid the price when their company's stock tanked just about the time they were due to head to the golf course for the next 25 years. Unless you have no other way, put some of your money in your company stock, but put 70% somewhere else.
Closely related to mistake of keeping all your eggs in the company basket, is failure to adequately diversify your investments. All but complete financial newbies will be aware that the purpose of diversification is to reduce risk, yet many of those same people will have large percentages of their retirement funds concentrated in sector funds, company retirement accounts, real estate, or a few company's stocks. If you're young you can have time to recover from a problem, but if you're nearing retirement, this can have devastating results. Anyone living through the tech bubble burst in 2000, or real estate investors in the last year or two (depending upon where you live) can attest to the perils of this approach. Yes, you can achieve spectacular results with investments that are concentrated in narrow sectors or industries, but that's a strategy best left to younger investors that have time to weather a storm, should one occur.
Retirement Financial Planning Mistake #6 is spending more than you make. This will not only make it much more difficult to save for retirement, but can leave you deep in debt. You want to have income and be debt free when you retire, not have a string of credit card bills and other debts to contend with. Remember that if you're truly retired, you're on a fixed income, so as inflation rises, your real income will fall. That doesn't leave room for too much debt.
Retirement Financial Planning Mistake #5 is failing to make a retirement plan. Yeah, we've all heard the “failure to plan is planning to fail” adage that's drummed into your head in business school and elsewhere, but you know, there's actually quite a bit of truth to it. You need to find the two things that every plan should incorporate; a goal, and a path to achieve it. A bit of oversimplification, yes, but that's what you need. You want to find out when you want to retire, what else (kid's college, vacation property, etc.) you'll have to fund along the way, and how much income you'll need to support you and yours in the lifestyle to which you've become accustomed (or any other lifestyle you may want to retire in). Once you've done that, you can sit down either with a retirement planning professional, or on your own, and make a step by step plan to achieve your goals.
Retirement Financial Planning Mistake #4 is funding other things ahead of your retirement. This is a common mistake, borne of parent's desire to see their children do better than they, or misplaced recreationally-oriented priorities (you bought a boat instead of maxing out your 401k). If you fund your kid's college fund at the expense of your retirement fund, all you're really doing is helping to ensure that your children will have the job necessary to help support you in your retirement years, because you won't have enough money. Better to not need their help and have them work their way through college like the rest of us. It will be far better for both of you, trust me.
Retirement Financial Planning Mistake #3 is using the “set and forget” approach to retirement planning. While there's nothing wrong with a buy and hold strategy when it comes to investing (Warren Buffett's done pretty well, after all), you want to revisit your asset allocation once in a while to ensure that your strategy is the most advantageous for the times. For example, technological, economic, political, and demographic shifts will make some industries have greater potential as times change. You want to be sure that you're taking advantage of this, or at least not getting caught heavily invested in dying or declining industries. You may also want to shift more of your assets from stocks to bonds to more closely match your investment requirements as you near retirement, for example.
Retirement Financial Planning Mistake #2 is common and very serious. It's starting too late. Learn from my mistakes here, please. The power of compounding is well known, but often ignored by young investors that have their priorities more closely aligned with this weekend, rather than what they'll be doing in 30 or 40 years. You're shooting yourself in the retirement foot with this strategy, however. As an example, if you're 25 years old and earn $40k/yr now, you can contribute 8% of your salary into a fund that earns 10% for the next 40 years. Assuming you et a 5% annual raise, you'll retire with a hair over $2.2 million. Making the same assumptions, but starting only 5 years later, at 30, and you'll have almost a million dollars less, just a bit under $1.3 million! If you stop and consider that people are likely going to live much longer, that money may have to last longer than you actually worked.
Retirement Financial Planning Mistake #1 is never starting or participating in a retirement savings plan at all. That's a sure way to find yourself on the opposite end of the wealth scale in your golden years. According to the U.S. Department of Labor, 25% of Americans who had an available 401K plan didn't participate in it. That's a financial tragedy that can keep wealth a distant dream you'll never have the pleasure of living. If you consider that many 401k plans include employer matching funds, you're turning your back on free money that can multiply your investment returns. Not too smart.
If you're just starting out, avoiding these top 10 financial planning mistakes. You can retire wealthy, the real tragedy is far too many people don't think they can do it, and so they're right. Remember (Debt Free Saying of the Day)
“Good luck is a created through the sacrifice of the persistent and the prepared.”
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