Here are the most common retirement planning mistakes that I see:
- Not creating a realistic assessment of financial resources. Half of all older workers haven't calculated what they need for retirement or budgeted for retirement expenses.
- Retiring too early with insufficient financial resources. This is a natural consequence of not preparing a financial-needs analysis. And an increasing reliance on 401(k)/account-based plans presents a significant challenge. The average 401(k) account balances of older Americans are far from sufficient to fund an adequate lifetime income.
- Starting pension benefits too early. Most workers retire before maximizing their retirement income.
- Starting Social Security benefits too early. Half of all Americans start taking benefits at age 62, the earliest possible age that generates the lowest amount of monthly income.
- Drawing down 401(k)/retirement savings too rapidly. Withdrawing just 4 to 5 percent per year is considered a safe withdrawal percentage, but many people withdraw at much higher rates. See Carla Fried's insightful post Retirees Plan on Going Broke for more on this topic.
- Making uninformed or poor choices of financial advisers and/or products. Choosing unwisely can seriously affect how much money your investments earn.
- Tapping home equity too early through home equity loans or reverse mortgages. You might need that money later in life if you need long-term care.
- Continuing an unhealthy lifestyle. Doing so increases your chances of developing expensive, debilitating conditions, which could also prevent you from being able to earn needed wages.
- Not having strategies in place for medical and long-term care expenses. You don't want these expenses to wipe out your retirement savings.
- Spending on items that are unnecessary, unrealistic, or unaffordable, given all the above mistakes. You don't want to run out of money in your later years and then regret buying things that weren't really necessary or important.
How do these mistakes happen? The problem is that many people just "wing it" with regard to managing their financial resources. For example, when drawing down their retirement savings, they take out what they need for living expenses and hope their money will last. Well, hope is not a good strategy!
Luckily, the correction for all 10 mistakes is the same: Have a plan. You've got to carefully consider just what your retirement needs will be in order to make sure you don't run out of money. You don't want to become destitute in your 80s, while you still have some good years of life ahead of you. A good plan will help you avoid this fate.
One of my trusted mentors told me that making mistakes was a great way to learn. Maybe so, but I'd rather that you learn from other people's mistakes, so that you don't suffer the consequences. In future posts, I'll be sharing tips about how to develop your plan, so you don't fall into any of these traps.
Image from iStockphoto contributor eurobanks