Retirement Planning – 8 Factors That Can Be Detrimental to the Success of Your Retirement Plan

Retirement Planning

Retirement planning is a long-term process that requires many strategies, methods, modifications, and brainstorming sessions along the way. Since most people plan to save for retirement at least 30 to 35 years before they retire, it can seem challenging to create a financial plan that will cover all your financial needs in your retirement. Moreover, life does not turn out exactly the way you foresee it. Getting divorced, losing money in the market, retiring early due to a health condition, economic downturns, etc. can stir up a storm in your financial plans when you least expect it. It is also hard to find a ‘one size fits all’ approach to retirement planning. Hence, most people tend to struggle in keeping up with a solid retirement plan that can stand the test of time and offer them the returns they desire. However, planning for your retirement planning does not have to be a challenge, as long as you are aware of and steer clear of factors that might deter your retirement plans.

This article talks about eight such factors that can be detrimental to the success of your retirement plan and how you can avoid them:

  • Not saving enough money to last through your retirement:

A lot of people view their retirement savings as a fixed number that they must achieve in order to live comfortably once they are no longer earning. However, the amount you need to save varies depending on your retirement goals and lifestyle and can change over the years based on your financial situation and other socio-economic factors. Your retirement can last anywhere between 20 to 35 years, sometimes even more. In the year 2020, there were only 92,000 centenarians, i.e. individuals over the age of 100, in the United States. The number of centenarians is expected to rise to 589,000 in the country by 2060. Additionally, with advancements in technology and medicine, life expectancy is likely to increase in the coming years. Hence, while the previous generations planned for a retirement fund that could last them 30 to 35 years, the present generation may have to plan for a savings fund that can last them longer. So, depending on your current age and income, you may have to increase your savings target and go beyond the fixed savings goals you had planned for earlier. Not saving enough money to last you a lifetime can put a lot of strain on you in your old age. This is especially tough since medical and long-term care costs rise with age. In the absence of adequate savings, you may have to compromise on your health needs.

Financial experts recommend contributing at least 10 to 15% of your monthly income to a retirement fund. This can help you slowly build a considerable retirement savings pool that can last you your entire life. You can use a retirement calculator to continually assess where you stand on your savings goals and whether you need to make any adjustments to your lifestyle in order to meet these goals. If you find yourself lagging behind, try to increase your savings to 20 to 25% of your monthly income. This may force you to cut back on your expenditure for some time; however, in the long run, it can prove to be beneficial.

  • Not prioritizing saving for your retirement:

You are likely to have other financial goals in life, such as planning for a child’s higher education. However, regardless of your responsibilities as a parent, your retirement savings should be your first priority at all times. A common mistake that can cost retirees their peace of mind in retirement is to use their retirement fund for education planning for their children, which can lead to them living a life of debt. This can lead to financial anxiety and a compromised standard of living during retirement. Your child has their whole life ahead of them and can use several ways to finance their education. You, on the other hand, have a limited amount of time left before you retire. Hence, the assumption that you can make up for the lost savings can backfire when you are without a stable income in retirement. While Individual Retirement Accounts (IRAs) are a common choice to cover the costs of college education, it may be advised to save individually in a 529 savings account.

Keeping your goals separate will let you focus on ensuring all your financial needs and goals are met, including your retirement goals. If you do fall short of college money for your child, remember that while planning for the higher education costs of a child is an important goal, it is highly recommended that you do not look to your retirement savings to fund their education. Your child has the option to take a student loan, find a job, or apply for a scholarship to cover the fees. Additionally, with the growing popularity of online courses, they may also find cheaper alternatives to earn their degree, while receiving the same high standards of education.

  • Not preparing for unexpected emergencies:

Life is unpredictable and things may pan out differently than what you had anticipated. These unexpected events can also come in the way of your finances. For example, getting divorced may result in a distribution of your assets. Similarly, marriage can also bring in more financial responsibilities, such as in the case of stepchildren. A crisis, like a job loss or salary cut, can also strike anytime. Hence, it is important to save for a rainy day. While it is common knowledge that an emergency fund should cover at least 6 to 8 months of your routine expenses, what most people tend to forget is to ensure that their emergency fund is kept separate from their retirement savings.

Make sure to account for any unexpected situations in the future when you draft your retirement plan. Keep aside some money for such events so you do not lag behind on your retirement goal, even if you are forced to take a detour along the way.

  • Misinterpreting your investment risk appetite:

Risk can differ for each investor based on factors such as age, income, their investment timeline, etc. Your risk level can ultimately alter the course of your rewards. Hence, it is crucial to understand your risk appetite and use it rationally to earn higher rewards. Ideally, the risk can be high at the beginning of your career. This is a time when you have very few financial responsibilities and a long timeline ahead of you. Even if you suffer a loss during this time, you have ample years in the future to make up for it. As you move closer to your retirement, your risk tolerance will most likely reduce. At this stage, you should move to more conservative investments. This ensures that your money continues to grow and, at the same time, your invested capital is safe in case of a market downfall.

Undermining or overestimating your risk tolerance at the wrong time can result in insufficient gains and ultimately impact your retirement corpus. Hence, make sure to take professional help and invest in the right instruments at the right time based on your risk tolerance.

  • Relying solely on Social Security benefits for your retirement:

While Social Security benefits can be an added advantage in retirement, they cannot suffice as the only source of income. Currently, the average Social Security benefit is approximately $1,543 per month. This can be grossly inadequate to cover routine expenses, medical costs, and unexpected expenditures. Moreover, if you opt for early retirement, you will not be able to use these benefits before the age of 62. In such a case, it is likely that you will be left with no other income option.

Keep in mind that Social Security can only add to your existing retirement savings but it can never be the primary retirement tool. Hence, make sure to invest in a retirement account, such as a 401(k) account, an IRA, a Roth IRA, etc.

  • Carrying debt into retirement:

Debt and high-interest rates can negate your investment gains and add on to your expenses. Hence, getting rid of debt is often encouraged. As detrimental as debt is at any age, things can get worse if you are struggling with it in your retirement. Retirement is a time when you have no active source of income and have to depend on your existing income sources for all your needs. With a rising rate of inflation, there is a high chance that you may already be struggling to maintain a favorable standard of living on limited retirement savings. Adding debt to this equation can make matters worse. High debt also sinks your credit score. So, if you need to take a loan in your retirement in the case of an emergency, you will find it hard to find a low-interest rate loan. Therefore, it may be advised to pay all your debt before you retire.

  • Ignoring taxes for withdrawals in retirement:

Taxes are an unwanted but inevitable part of your finances. They can consume a better part of your savings in retirement too. So, it helps to plan them in advance. One of the best ways to avoid or lower taxes in retirement is to pick a Roth account. A Roth IRA offers tax-free withdrawals in retirement, while its counterpart, the traditional IRA, gives you tax-deferred growth with taxable withdrawals in retirement. You can choose an account based on your current income and other financial needs and goals.

Other taxes can include state tax, inheritance tax, etc., depending on where you wish to retire. Keep these factors in mind while planning your retirement, so you do not end up with a lower than expected retirement corpus.

  • Starting to save for retirement late:

The sooner you start saving for retirement, the more money you can save. Starting late is one of the biggest mistakes you can make. It is vital to note that retirement makes up for 30 to 35 years of your life. Depending on your health, this could be even longer. Your career lasts for a similar time frame. In this time frame, you need to save for the future and cater to your present financial needs. This leaves little room for error or procrastination.

Try to start saving as soon as you can. While your retirement contributions can differ based on your present needs and expenditure, it is vital to ensure you have a retirement plan in place.

To sum it up

Planning for your retirement is a dynamic process that will require many changes as per the fluctuations of the market and your personal financial goals. However, keeping a realistic view of the future can help you pick the most appropriate techniques and methods to prepare for the golden years of your life. Remember that a small mistake can sometimes lead to bigger blunders. Therefore, paying attention to minute details while planning for your retirement is critical. Try to keep the points mentioned above in mind while making your retirement plan. This will ensure that you save optimally for your retirement without overlooking factors that deter you from achieving your savings goals.

You can also reach out to a professional financial advisor in your area to get recommendations on the most suitable retirement planning strategies based on your financial goals and requirements.