Retirement is something that seems so distant in the future for a lot of us. In addition, once we get to retirement, it is something that is so foreign to us, especially after spending all of our life up to this point working and saving. With that said, it makes sense that many individuals make common mistakes as pre-retirees. The actions that a pre-retiree makes today are not felt until much later on when they are actually retired. Because the impacts are not immediate, it is easy to make those mistakes.
In this article, we’d like to share several common mistakes that pre-retirees make. Our hope is for this list to provide some guidance for you as you plan for retirement.
Not Saving Early Enough
Compounding interest is a very important financial concept that allows interest to earn on top of interest. Therefore, the earlier you start saving, the longer time horizon you have for your savings to compound. A common mistake that pre-retirees make is starting their savings journey much later than could have been possible. Even if it is just small amounts of money saved early on, the compounding effect will be worth it in the long-run.
Not Creating A Financial Plan Or Having Retirement Goals
Without a plan, you are just shooting in the dark and hoping that the wealth that you have accumulated will last until you die. This is an irresponsible way to plan for your retirement, especially as life expectancies are increasing.
By having retirement goals and creating an actual financial plan, you can see exactly how much money you need to live off of, how you are going to achieve your other goals, and maybe how much of your wealth is going to be left to your estate. If there ends up being a shortfall based on your financial plan and expected earnings/savings before retirement, there are many planning strategies that can be done early on before it is too late.
No Concept Of Budgeting Or Expenses
Similar to the above point, it would be impossible to create an accurate financial plan without having an idea of your budget and expenses. For pre-retirees that are not aware of these items, it can be a rude awakening when they realize actually how much income they need to generate in retirement to cover their expenses. Creating a budget early on and tracking expenses will allow you to have more of a pulse on all of your finances as you get closer to retirement.
Failing To Consider How Time Will Be Spent During Retirement
Retirement is a foreign chapter in our lives that will be unfamiliar once we arrive there. It is important that you take the time as a pre-retiree to consider how you’d like to spend your time as a retiree. For some, they will love being at home all day, seeing grandchildren, and playing golf. For others, it may make sense to work part-time, consult, and keep one’s mind going. Everyone is going to have different desires about how to spend retirement, but if you neglect thinking about it before retirement hits, you will find yourself bored.
Failure To Reevaluate Portfolio As Retirement Approaches
It is easy to let our different investment accounts just sit there as retirement approaches. This is certainly the case if you have a high level of risk tolerance and the market is doing well. However, it is vital that you reevaluate your portfolio as you get closer to retirement. Nobody knows what the market is going to do, but we do know that as retirement approaches, you cannot afford a downturn in the market. Your retirement funds are going to be tapped soon with retirement right around the corner, meaning that you will not be contributing as many funds soon, and you need to maintain principal. As a rule of thumb, as retirement gets closer, your portfolio should start evolving closer to a higher percentage of fixed-income and a lower percentage of equity.
Selling Off Or Going Cash When Markets Decline
If you are a younger pre-retiree, you have a longer time horizon until retirement hits. Because of that, you have the ability to bear the volatility of the market. By staying the course, you may lose some money in the short run, but in the long-run, you will win. A big mistake that we see from pre-retirees is selling off and going all-in to cash as the markets decline. By doing this, you miss out on buying at market lows, and ultimately riding the wave when the market rebounds.
Using Retirement Funds To Pay For College
This is a common mistake that pre-retirees make early on, thinking that they will be able to make up for the money taken out of their retirement accounts to pay for their children’s college. While it is a great thing to pay for your children’s cost of college, you have to weigh the pros and cons of doing so. Most students are able to apply for scholarships, grants, financial aid, take out low-interest student loans, and work while attending college. If you saved some funds into 529 accounts but cannot cover all of the costs of college, look to the above-mentioned options for your student before tapping into your retirement accounts. If you deplete a good chunk of your retirement funds early on, you are just setting yourself up for a different type of financial strain that cannot be financed.
Underestimating Life Expectancy
The reality is that most individuals are going to live longer than those in the past due to improved technologies, medicine, and a better awareness of health, wellness, and exercise. What this means is that retirement may not be from age 65 to age 90. Instead, it may be from age 67 to age 107. With that math, retirement periods could grow from 25 years to 40 years for the average individual. By realizing this fact as a pre-retiree, you can at least get yourself prepared for what is to come. This may mean trying to save more, work until a later age, or consider working part-time while in retirement.
The First Step To Avoiding Mistakes
Planning for retirement involves a lot of decisions to be made today that can drastically impact your future self in retirement. If you’d like to learn more about actions to take to get on track for your retirement, please do not hesitate to reach out. You can contact me at (626) 529-8347 or email me directly at [email protected].
About Haydel, Biel & Associates
Haydel, Biel & Associates is an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at [email protected].