The Federal Reserve Board’s Survey of Consumer Finances finds that almost 50% of today’s American households have no retirement savings. What’s more, those who are saving diligently often make mistakes that drastically reduce their nest egg.
Because retirement planning is so often pushed to the back burner, Joe Schmitz Jr., CEO of Peak Retirement Planning Inc., warns that simple mistakes negatively impact what people can look forward to in their golden years.
Procrastination is the silent killer of retirement dreams
The retirement journey begins when the first paycheck arrives. Not starting early enough is an expensive error. While compound interest is a strong tool, it requires time to demonstrate its effectiveness.
The sooner people begin saving for retirement, the more significant benefits they receive. For instance, if they start investing $200 monthly at an 8% interest rate at 25 years old, they will accumulate around $622,000 by age 65. However, if they begin at 35 years old, they will only amass around $294,000 by the time they reach 65, assuming the rate of return remains constant.
“Start now, regardless of how old you are,” Schmitz advises. “Make saving for retirement a top priority, reduce unnecessary spending, and consult a financial planner to help you catch up.”
Many exacerbate the issue of beginning late by tapping into their retirement savings prematurely. Withdrawing funds early can result in serious repercussions, such as incurring penalties and taxes. It will also diminish the growth potential of investments.
Schmitz recommends that clients do whatever it takes to avoid making early withdrawals. To handle unforeseen costs, create a separate fund for emergencies that is not connected to your retirement accounts. This enables your retirement funds to increase without interruption.
Underestimating the cost of healthcare and inflation can cause you to outlive your savings
Today, people are living longer, facing increased healthcare costs, and stretching their savings across longer periods of inflation. Planning for a 20-year retirement and living for more than 30 years will inevitably result in a financial shortfall.
Schmitz advises clients to prepare for longevity. “It’s not unrealistic to expect that you will see your 90s. Adapt your savings targets and expenditures accordingly.”
Many plan on retiring at 65, assuming that Medicare will cover their healthcare costs. Nevertheless, Medicare does not provide coverage for everything, and at this time of life, medical costs tend to rise. Today, a retired couple should be prepared to spend over $300,000 on healthcare costs.
Schmitz suggests including healthcare expenses in the retirement plan. “If eligible, consider getting a Health Savings Account. Saving money to cover healthcare costs will prevent the unexpected financial difficulties that derail many people’s peaceful retirement years.”
In addition to medical costs, people need to prepare for the cost of daily living during retirement since they will be without a steady flow of income. Part of this involves accounting for how inflation gradually diminishes buying power. A substantial nest egg today will appear much smaller in 20 or 30 years.
The average inflation rate hovers around 3%. Although the impact may not be significant on an annual basis, it becomes substantial when accumulated year upon year.
With this in mind, Schmitz recommends employing investments protected against inflation. “Put money into assets that have the potential to increase in value at the same rate or faster than inflation,” he says. “Some options include stocks, equity ETFs, or real estate.
Develop a comprehensive retirement plan
Careless retirement strategies lead to ineffective results. Without a clear plan, people typically either save too little or overlook critical tax-efficient investing tactics.
“Develop a detailed strategy,” Schmitz suggests. “Evaluate your present financial status, establish specific objectives, create a comprehensive strategy to achieve them, and seek guidance from a financial consultant to ensure your plan aligns with your future goals.”
According to Schmitz, a method for tax reduction is critical to this thorough retirement plan since taxes significantly impact retirement savings. Various accounts are subject to differing tax rules, and knowledge can enhance the efficiency of withdrawals and savings.
Schmitz suggests that a successful retirement plan includes diversifying how investments are taxed. “Invest across a mix of accounts, including tax-deferred accounts like traditional IRAs, tax-free accounts like Roth IRAs, and taxable accounts,” he explains. “This strategy provides flexibility and potential tax advantages when you eventually withdraw the funds.”
Another essential component of a thorough retirement plan is estate planning. Without taking time for this critical step, a person’s assets may not be distributed according to their wishes, and their loved ones could face legal hurdles and unnecessary taxes.
“Prioritize estate planning,” advises Schmitz. “Create a will, assign powers of attorney, consider trusts, and update beneficiaries on your accounts. Regularly review and update these documents to reflect life changes.”
When people steer clear of common mistakes, they can enjoy a secure and enjoyable retirement. “Enlist the help of financial advisors, continually educate yourself, and adapt to changes, Schmitz concludes. “With diligent planning and the right strategies, you can turn your dream of a restful retirement into a reality.”