Funding your retirement requires careful planning, and it's a task that shouldn't be taken lightly. Even if you have a sound strategy laid out today, you need to be aware that many things can change along the road to reaching your retirement goals. To help you avoid possible pitfalls that may confront you in the future, the following is a list of common mistakes people make when saving for retirement.
Forgetting inflation: Over the next 20 or 30 years, it's very possible that your cost of living will double or even triple. And while the effects of inflation aren't so obvious from year to year, when you're looking at retirement savings you need to consider how inflation will impact your finances over the course of several decades.
Lacking proper allocation: The combination of asset classes, such as stocks, bonds and cash, in your portfolio is what's known as your asset allocation. Unfortunately, many investors' portfolios are not properly allocated for their risk tolerance and stage in life. If you're in your 30s, for example, you have many years until retirement, so you can probably afford a little more risk in your investments. A retiree in their late 60s, on the other hand, could expose their portfolio to too much risk by investing aggressively. Remember, asset allocation does not guarantee against loss; it is a method used to help manage investment risk.
Underestimating taxes: Similar to the effects of inflation, taxes can also be detrimental to the health of your retirement savings. Investing in tax-deferred programs, such as an Individual Retirement Arrangement or 401(k), allows your money to accumulate free from tax until you withdraw it at retirement.
Underestimating retirement spending: While you may think you will need less money to maintain your lifestyle, many people find that they spend almost 85 percent of their pre-retirement income, or more, when they finally reach retirement. Taking more vacations, making home improvements and dining out more frequently are just some of the many expenses you may encounter, not to mention unexpected health care or long-term care expenses.
Expecting unrealistic investment returns: Your long-term investment strategies should be based on realistic return expectations. There will always be fluctuations in the market, but it's important not to let those distract your focus. To achieve success with your retirement investments, you need to develop the discipline and patience to stick with your long-term objectives.
Relying solely on investment returns: Like many others, you may be under the impression you can build a sizeable retirement nest egg and then live off of the interest and dividend payments alone. Unfortunately, while such a strategy may serve you well, it can create serious income and estate tax consequences for your heirs. Consequently, you may want to consider other options.
Underestimating retirement years: Another thing you may not consider is just how much time you will actually spend in retirement. Better nutrition, quality medical care and growing health consciousness have all contributed to longer life expectancies in the United States. Keep in mind, the time you spend in retirement could even exceed your working years, so you'll need to make sure your money will last as long.
Failing to plan for health care: Along with additional life expectancy comes the possibility you'll eventually need some form of long-term care. Without careful planning in advance, these expenses pose a significant risk to your retirement savings. Fortunately, however, there are insurance strategies you can take advantage of that can help safeguard your retirement assets.
As with most aspects of successful investing, it's important to plan ahead when it comes to your retirement, and recognizing these mistakes is the first step to avoiding obstacles down the road.
A.G. Edwards generally acts as a broker-dealer, but may act as an investment advisor on designated accounts, and the firm's obligations will vary with the role it plays. When working with clients, the firm generally acts as a broker-dealer unless specifically indicated in writing. To better understand the differences between brokerage and advisory services, please consult "Important Information About Your Relationship With A.G. Edwards" on agedwards.com.
Linda Foreman is a certified public accountant and financial consultant for A.G. Edwards & Sons Inc., located at 1540 Cornerstone Blvd., Suite 110, Daytona Beach. She can be reached at (386) 274-5488.