Whether retirement is imminent or decades away, the decisions you make now could impact your ability to pursue the retirement lifestyle you want.
You’ve heard the stories. Hard-working people on the road to achieving their retirement dreams become sidetracked by unforeseen developments—unexpected medical expenses, a downturn in the stock market, a job loss. Perhaps you’ve experienced setbacks with your own retirement plans.
Here are eight common mistakes many investors make with their retirement savings—and tips for keeping those factors from throwing you off course.
Mistake No. 1: Forgetting about inflation’s effects
During the next 20 to 30 years, your cost of living will likely double—or even triple. For example, a retirement fund of $1 million generating 7% interest will generate a $70,000 income today. But in 20 years, at a 3% inflation rate, you’d need more than $125,000 ($126,428) to maintain the same standard of living.
Tip: Evaluate your ability to meet future needs by taking your current expenses, inflation, taxes, and annual savings into consideration.
Mistake No. 2: Not having a properly allocated portfolio
Many investors’ retirement assets are not properly allocated based on their risk tolerance and stage in life. By not having an appropriate asset allocation, you could be exposing your portfolio to unnecessary risk or investing too conservatively to achieve your goals.
Tip: Ask your financial advisor for an asset-allocation analysis to provide a snapshot of your current portfolio. Then discuss how you can reposition your assets to better help achieve your objectives or reduce your portfolio’s volatility.
Mistake No. 3: Underestimating taxes
If you put money into a tax-deferred investment—such as a Traditional IRA, 401(k), or another qualified retirement plan—it can accumulate free from tax until you withdraw it at retirement. Any withdrawal before the age of 59½, however, may be subject to a 10% IRS penalty and will be fully taxable.
Tip: Many investors withdraw tax-deferred investments over time, which can help them manage the impact of taxes on the withdrawals from the deferred account. Withdrawals over time as well as having a lower tax bracket in the future will potentially result in larger after-tax values compared to saving in a taxable account.*
Mistake No. 4: Underestimating your spending during retirement
You may think you’ll spend less in retirement than you do now. But are you taking into account the possibility that you’ll want to take more vacations, make home improvements, and dine out more frequently? Are you considering the likelihood that you’ll face unexpected healthcare, long-term care, and other expenses?
Tip: Estimate how much money you’ll need during retirement and determine strategies that could help you supplement your income.
Mistake No. 5: Having unrealistic investment expectations
Some investors believe that when the market is down they should sit on the sidelines until it rallies. If the market is up, they wait for a correction to buy at lower rates. These tactics seldom work.
Tip: When building assets for retirement, you need to stay focused on your long-term goals. It’s important to base your long-term investment strategy around realistic return expectations. Keep in mind, there will be “up” and “down” years. Successful investors, however, develop the discipline and patience to shrug off market fluctuations.
Mistake No. 6: Underestimating the time you will spend in retirement
Because of better nutrition, quality medical care, and a growing health consciousness, people are living longer. About one out of every three 65-year-olds today will live past age 90, and one out of seven will live past age 95.1 That means you may live 20 to 30 years or more without receiving a paycheck.
Tip: Don’t outlive your nest egg. Develop a plan to help pave the way for a potential income stream throughout retirement.
Mistake No. 7: Mismanaging your tax-deferred assets
Some investors start taking withdrawals from their IRAs or retirement plans as soon as they reach age 59½. Some people take withdrawals even earlier—which may cause their nest eggs to deplete faster.
Tip: Required minimum distributions (RMDs) must be taken from traditional IRAs, annuities, and, in many cases, 401(k) plans once you reach age 72. (If you turned 70 ½ on or before December 31, 2019, you must still start RMDs at age 70 ½, not 72.) No mandatory distributions are required from Roth IRAs at any age. Consider withdrawing funds from taxable investments first. This will give your tax-deferred vehicles more time to work for you.
Mistake No. 8: Failing to plan for unexpected health care issues
On average, an American turning 65 today will incur $138,000 in long-term health care costs for future services and supports.2 Today the median annual cost of a private room in a nursing home is more than $100,000.3 If you require nursing-home care in 20 years, it could potentially cost you more than $200,000 each year, assuming a 4% annual increase in costs. Keep in mind, government assistance for these expenses is very limited, and few people qualify for it.
Tip: Without proper planning, you could see long-term health care expenses wipe out your life savings, leaving you no money to live on and nothing to leave behind for your loved ones. Have an insurance strategy to help you safeguard your retirement assets and preserve wealth for your heirs.
Finally, if any of these mistakes sound familiar, talk with your financial advisor about creating a financial strategy suited to your needs or adjusting an existing plan to help you stay on course to achieve your retirement goals.
Wells Fargo Advisors is not a tax or legal advisor.
*You should consider your personal investment horizon and income tax brackets, both current and anticipated, when making an investment decision because these may further affect the comparison’s results.
1 Source: www.ssa.gov/planners/lifeexpectancy.html
2 Long-Term Services and Supports for Older Americans: Risks and Financing Research Brief 07/01/2015; Revised February 2016
3 Genworth 2019 Cost of Care Survey