3 Major Errors That Can Derail Your Retirement Planning
If you’ve been saving diligently and investing prudently for retirement, that’s terrific. But it’s not enough. Even people who get the fundamentals right often fall down when it comes to other key areas of retirement planning. Which is why you want to avoid these three big mistakes that new research shows can often trip us up and undermine our retirement planning efforts.
Mistake #1. Failing to estimate how much you need to save. Contributing regularly to 401(k)s, IRAs and other retirement accounts is clearly an important step—indeed, the single most important—to preparing for retirement. But you also need to be able to gauge whether your savings regimen is working—that is, whether you’re saving enough to actually make progress toward a secure retirement. And, unfortunately, too many people fail to do that.
According to the recently released 2017 Employee Benefit Research Retirement Confidence Survey, nearly half of workers 55 and older haven’t attempted to calculate how much they’ll need to live a comfortable retirement. The percentages are even higher for younger workers. Almost 60% of 45- to 54-year-olds and nearly 70% of 25- to 34-year-olds haven’t done such a calculation.
Fortunately, there are plenty of online tools that can help you determine whether you’re saving enough to stay on track. But rather than use a calculator that purports to arrive at “Your Number“—i.e., telling you you need a nest egg of exactly $1,255,420 or whatever—you’re better off with ones like T. Rowe Price’s Retirement Income Calculator and the Boston College Center For Retirement Research’s Target Your Retirement tool that focus on how much of your current income you’ll need to replace at retirement, and then help you estimate whether you’re on track to generate that income from a combination of Social Security payments, withdrawals from savings and other sources.
If you’re uncomfortable doing this sort of number crunching on your own, you can always hire a financial pro to do it for you. But one way or another you need not just to save for retirement but to know whether you’re saving enough to maintain the retirement lifestyle you envision.
Mistake #2. Underestimating how long you’ll live in retirement. A recent Financial Engines survey that tested 1,000 people on their knowledge of a broad range of retirement and financial topics found that nearly three out of four of those polled didn’t know that a typical 65-year-old man can expect to live another 20 years or so. More than 60% underestimated that 65-year-old’s longevity by five or more years.
That sort of misunderstanding about how long one is likely to live after calling it a career can wreak havoc with your retirement planning. After all, if you base your savings rate during your career and the size of your nest egg withdrawals after you retire as if you’ll live to 80 and you make it to 85 or 90, those “bonus” years may end up being kind of bleak.
It’s not possible, of course, to know exactly when you’ll depart this life. But you can get a reasonable idea of how long might be around by going to the Actuaries Longevity Illustrator tool, which you can find in the Lifestyle section of RealDealRetirement’s Retirement Toolbox. Unlike other calculators that merely tell you your the life expectancy—or the age, on average, to which someone your age is likely to live—the Longevity Illustrator provides a broad range of possibilities. For example, it shows that a 60-year-old non-smoking woman in average health has a 46% chance of living another 30 years to age 90 and a 26% probability of living another 35 years to age 95.
Thus, by understanding that you likely have a decent shot at spending 25, 30 or even more years in retirement, you can better plan both for how much you’ll need to save and how carefully you’ll want to manage withdrawals to avoid running through your nest egg too soon.
Mistake #3. Not realizing how much you can boost your income by postponing Social Security. Unless your net worth rivals that of Mark Zuckerberg or Warren Buffett, the monthly income you receive from Social Security will represent a significant portion of your spending money in retirement. But another finding of the Financial Engines survey is that many people aren’t aware that they have the ability to substantially increase the size of their Social Security payments.
Specifically, almost two thirds of the people polled didn’t know that they could collect an extra 6% to 8% for each year they delay claiming benefits between age 62 and 70. Over the course of a lifetime, Financial Engines estimates that claiming Social Security too early may cost individuals as much as $100,000 in lifetime benefits, while couples could be giving up twice that amount.
You can get an estimate of the monthly benefit you would receive at various ages by going to Social Security’s Retirement Estimator. To see how much more you might receive over your lifetime or, if you’re married, how much extra you and your spouse may be able to collect by better coordinating the ages at which you claim, you can check out Financial Engines’ free Social Security Planner tool. Or for a more comprehensive analysis, you can check out services like Maximize My Social Security or Social Security Solutions, which, for a fee, can help you evaluate your options.
The main point, though, is that unless you’re okay with possibly leaving tens of thousands of dollars or more of potential lifetime benefits on the table, you need to start thinking seriously about when you’ll claim Social Security well before you retire. (9/14/17)
Walter Updegrave is the editor of RealDealRetirement.com. If you have a question you would like Walter to answer online, send it to him at firstname.lastname@example.org. You can tweet Walter at @RealDealRetire.