Kiplinger’s 10 Financial Decisions You Will Regret in Retirement outlines some major mistakes you can make when planning for retirement. And, as in any endeavor, the most serious potential errors are those you cannot correct or recover from.
As the article points out, one of the most common planning errors is thinking you will work indefinitely. In many cases, planning to work to age 70 or later reflects not a true desire to remain in the workforce, but a general lack of planning. That is, you figure you haven’t saved enough for retirement, so you will just keep working and postpone retirement. Trouble is, you could be forced to retire. Many folks get laid off late in their career like many have during the Financial Crisis. Others develop health problems that make it impossible for them to continue in their job.
The article underscores that the dichotomy between the best laid plans and reality is quite stark. According to a 2015 survey from the Transamerica Center for Retirement Studies, three out of five retirees left the workforce earlier than planned. Of those respondents, 66% retired because of employment-related issues, including organizational changes at their companies. Health-related issues–either their own ill health or that of a loved one–caused 37% to stop working. Transamerica also found that while 51% of workers expect to continue working some in retirement, only 6% of actual retirees report working in retirement as a source of income.
The lesson here? Because you cannot count on working as long as you think you might, you need to start to save early and save all you can throughout your career. Here’s an example from the article of the boost an early start provides: “Morningstar calculated how much you need to sock away monthly to reach the magic number of $1 million saved by age 65. Assuming a 7% annual rate of return, you’d need to save $381 a month if you start at age 25; $820 monthly, starting at 35; $1,920, starting at 45; and $5,778, starting at 55.” That’s great motivation not to procrastinate.
However, if you have procrastinated — or even if you want to save every dollar Uncle Sam allows you to in your 401(k) — remember that at age 50, you can start making catch-up contributions to your retirement accounts. In 2016, you can sock away an extra $6,000 in a 401(k) and another $1,000 to an IRA.
The article also points to another lapse in sound decision making on the other side of the retirement planning equation. Many folks decide to take their Social Security benefits early at age 62. However, in this instance the early bird does not catch the worm. That’s because you don’t receive your full retirement benefit at age 62. Qualifying for 100% of your benefit requires waiting until age 66 (or 67 for those born after 1959) before taking Social Security. Waiting until 70 can be even better because each year you delay tapping your benefit, it grows by approximately 8%. In today’s environment of low and slow growth and historically low yields, 8% risk free is quite a return!
Of all planning decisions, when to take Social Security is worth discussing with your trusted advisor as strategies can differ for couples and divorced spouses. In addition to the advisor’s expertise on this issue, you can benefit from applying a rational, disciplined approach to all your financial decision making. Today’s volatile investment environment makes it more important than ever to make measured, prudent decisions and avoid common planning mistakes.