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retirement planning mistakes
In an article on MarketWatch.com, Brett Arends cites a survey conducted by the money management firm, Natixis. In this survey, financial planners were asked about the top 10 mistakes they see among clients. This tally of top ten mistakes is a great checklist to see how you are doing.
Click Here to see the list of the top 10 retirement planning mistakes.
- Underestimating the impact of inflation. We are all feeling the pain of inflation but few of us realize the true impact on our savings. So far, the S&P 500 is down 17.5% this year. In terms of real purchasing power, the figure is a much more brutal, 22%. If inflation averages just 3% a year, over 25 years, the purchasing power of a dollar falls by 50%!
- Underestimating how long you will live. Many people’s retirement savings can last 10 or 15 years but can it last 20 years? We have a number of clients who are already in their 90’s. People also tend to underestimate “joint longevity,” or how long at least one of them will live. For a couple age 65, there is about a 50/50 probability that the husband will live to age 83 and the wife to age 86.
- Overestimating investment income. It’s common for people to follow rules of thumb such as, “you need $1 million to retire,” without looking closely enough at their actual retirement income. A lot of people rely on the 4% rule. At 4%, that $1 million will only give you a gross income of $40,000. The after tax net will be even smaller.
- Being too conservative in investments. This means holding too much of your portfolio in cash or deposits, and investing too little in longer-term investments such as stocks.
- Setting unrealistic return expectations. In the survey, financial advisers told Natixis that, on average, their clients are expecting to earn returns of 17.5%. Even for a high-risk portfolio of 100% U.S. stocks (the S&P 500), the long-term average has been only 6.8% (less inflation). For balanced portfolios of 60% stocks and 40% bonds, the return is less than 5%.
- Forgetting to factor in healthcare costs. According to Fidelity estimates, the average 65-year-old couple retiring in 2022 will need $315,000 to cover future healthcare costs.
- Failing to understand income sources. Retirement used to depend on a “three legged-stool;” your pension, your savings, and your Social Security. Today, hardly anyone in the private sector has a pension. Are the other two legs strong enough to support your retirement?
- Relying too much on public benefits. According to the Social Security Administration, the average benefit for a retiree is $20,000 a year. For about two-fifths of people over 65, their Social Security benefit accounts for at least half of their income.
- Underestimating real estate costs. Even if you’ve paid off your mortgage by the time you retire, you will still be facing rising property taxes, insurance and maintenance costs.
- Being too aggressive in investments. Speculative stocks and things such as cryptocurrencies have plunged this year but, no one knows if we’ve even hit the bottom yet. Too much risk is especially dangerous for those nearing retirement or in early retirement. These people could have long-term plans upended by a few bad years in a row.
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