Are you thinking of your retirement? At some point everyone will be retiring and enjoying their golden years. But there are some common mistakes that many people make when thinking of or planning what their retirement will be like. How is this possible you ask? We it is all in how we look at our retirement, our planning, and how will it be funded. In previous generation’s retirement was funded with pensions from companies that people worked at for their entire careers and social security as the full retirement age was lower. Think of my grandparent’s generation. They could retire at age 65 so taking Social Security at age 62 did not reduce the benefits as much as it does for someone my age who has a retirement age of 67. Now we will look at three areas where many people make some very common and in some instances costly mistakes.
One of the biggest mistakes people who are planning for their retirement make that they do have some control over is how much they save and what they use for an expected rate of return on that money. One way to ensure you will have the money you need in retirement is to save as much as you can as early as you can. Someone who starts saving in the mid-20’s will have to save considerably less than someone who starts in their mid-30’s. The reason for this is the power of compounding interest over 40 years instead of 30 years. For this part of the example we will assume a savings of $400 a month for the entire period and we will assume a conservative 7.5% return on your investment. Now the 30 something will have at age 65 or 30 years a total investment with a valued of about $542,000. Now that same investment made over 40 years with the same assumptions from a 20 something would be worth about $1,200,000. As you can see the power of compounding just over the additional ten years over doubles your investment.
The second part of people’s saving is the amount they save and the return they expect. We will use the same assumptions as before but now the 30 something wants to have the same $1.2 million. In order to do that one of two things, or possibly both, need to occur. One they will need to save more every month or two they will have to have a higher rate of return on their investment by taking on additional risk. In many instances the 30 something will have to do both of these in order to reach the same $1.2 million. If you take on no additional risk you would have to pay $885 a month to achieve this goal, an increase of $445. Now let’s say you take on more risk as you cannot afford to save an additional $445 a month and you project a return of 9%. Now you would have to save $650 a month or an additional $250. But is 9% realistic with your investment choices and your risk tolerance? As you can see one or the other will need to occur, most likely both, in order to reach the savings goal of $1.2 million.
A second area that many people make mistakes with as it concerns to their retirement is the possible income of employment after they retire. In some recent surveys a majority of people who are in the initial stages of planning their retirement they plan on working at least part-time in retirement. While there is nothing wrong with the concept what is not a good retirement tool reduce your savings amount due to the fact you anticipate income in retirement. It is never a good idea to try to make up for savings and the power of compounding of interest with a post retirement income. First as with the returns you will make on your investments, making enough money in retirement is not guaranteed. While I plan on working past my retirement age in some capacity I will not use any projected income in my planning as that is not a given and who knows, I may even change my mind in the next 25 years.
Lastly there is the popular subject of Social Security. While in recent years the number of people who are taking early retirement at age 62 is declining it is still the most common age at which people take their benefits. For someone like me that means a decrease of around 30% from what I would get at my full retirement age of 67 as they reduce your benefits by about 6% a year that you take the benefits early. On the other side if you are set to retire at 67 and wait until age 70 to take your benefits you will get an additional 24% for delaying your benefits for three years as they will reward you with an 8% a year increase. With proper planning in regards to Social Security you can maximize your benefits of yourself and your spouse. Consult a financial planner and visit with a Social Security specialist for more information.
While retirement is going to be in everyone’s future as you can see it does take some realistic planning to ensure you get the most out of yours. For more information feel free to contact me and I will be more than happy to answer any questions you may have.