To prevent the retirement crisis from spreading, Americans need to be informed of some of the costly mistakes that can have dire implications to their financial future. Avoiding these mistakes will help put you on the road to a secure and happy retirement.
Mistake #1: Being Saddled With Debt
The decision of whether you should pay off your credit card and other debt before saving for retirement is one that you will want to make with your financial advisor. Everyone has a unique set of circumstances, but it’s important to keep in mind that these three debts can be extremely costly down the road.
- Mortgage: Being saddled with mortgage debt can be costly. If possible, try to pay off your mortgage by your retirement date. Even if you pay an extra $100 to $500 a month towards your mortgage, it could shave years off your mortgage payment schedule and save you thousands of dollars in interest.
- Equity Lines of Credit: If you are approaching retirement, it’s really best to avoid the costly mistake of treating your home like an ATM. While taking out equity lines of credit and refinancing that extends the loan term may seem attractive, they often come with long term costs. If possible, it’s best to manage your home loans so they will be paid off when you retire.
- Automobile Debt: A car is a big expense for a lot of people. While you may feel compelled to buy that luxury car you’ve always wanted, be careful about spending too much and acquiring too much debt. Remember, in addition to the purchase price, you’ll also be saddled with gas, maintenance fees, and the monthly payment. It’s also important to keep in mind that your car is going to depreciate in value the minute you drive it off the lot.
Mistake #2: Failing To Coordinate
According to a Retirement Confidence Survey, only 40 percent of Americans have actually calculated how much they’ll need to save for retirement. 42% simply guess at the amount (and it’s usually too low). If you have a spouse or partner, it’s critical to coordinate with that person when it comes to retirement savings. You will want to be on the same page and start at least five to ten years in advance.
There are a number of questions that you’ll want to answer together, including what you want your retirement years to look like — including where you’d like to live and what types of activities in which you’ll want to engage. It is also important to coordinate insurance policies, survivor benefits, health insurance, and long-term care insurance.
Mistake #3: Having a Rich Ratio Under 1
The Rich Ratio is a concept I have been using with my clients for years. Simply put, the Rich Ratio is the amount of money that you have in relation to the amount of money that you need.
Have/Need = Rich Ratio
The goal is always to have a Rich Ratio over 1. To calculate your Rich Ratio, take the amount of monthly income you should have or do have in retirement (Social Security + pension+ any additional steady income streams), including what your nest egg should produce, and divide it by what you expect to spend each month to live the retirement you want.
Here’s an example:
Tom needs $3,500 to live the good life, in part because his house is paid off. Tom has a small pension of $1,200/month. He will receive Social Security of $1,800 and has $400,000 in his 401(k).
Tom’s Have = $1,200 (pension) + $1,800 (Social Security) + $1,650 [5% of his 401(k) on a monthly basis] = $4,650
Tom’s Need = #3,500
Tom’s Rich Ratio = $4,650/$3,500 = 1.32
Good for Tom, his Rich Ratio is over 1 and he’s going to live the good life!
Mistake #4: Overlooking Inflation
As you plan for retirement, but sure to consider inflation. This can become unexpected and costly to you in the end if overlooked. Remember that the prices you’re paying for goods and services now are not the same prices that you’ll be paying in your retirement years. If inflation is 3% per year, and your assets grow at only 3%, then in terms of your real world spending power, you are no better off. A few examples of real world areas of spending to consider are:
- Energy Costs: Includes the costs for fuel and electricity during the summer heat and driving season and natural gas during the winter month as the heat kicks on.
- Medical Care: Medical care includes prescription drugs, eyeglasses, and visits to the doctor.
- Recreation: May include the cost of cable TV, movies, and pets.
- Food: Food includes the cost of groceries and restaurants.
Mistake #5: Taking Too Much Risk
For many people, 2008 was a year of immense economic turbulence and loss. The Great Recession had far reaching negative effects that shattered the nest eggs of many retirees. While it may be human nature to try to put those pieces back together as quickly as possible, taking too much risk is generally not encouraged.
Products that promise you returns that seem too good to be true oftentimes usually are. For example, there are certain types ofannuities that have a number of risks associated with them that people fail to see. Even though they “promise” a great return, some simply have too many restrictions, too much control from the annuity company, and you have to take a gamble that the annuity company itself will not run into financial trouble — all this for too little return.
It’s best to discuss increasing the risk of your investments with an investment advisor. They will be able to assess your particular situation and put a plan of action in place that may involve a more risk-free asset such as the Ten-Year US Government Treasury Bond.
Do any of these mistakes sound familiar to you? If so, it’s not too late to turn things around. Be proactive today to set yourself for a secure and happy retirement tomorrow.