8 Financial Mistakes that Could Wreck Retirement
CERTIFIED FINANCIAL PLANNERS™ and financial coaches are often on the hot seat when talking about the future. There are a couple of reasons this is the case. For starters, we're the experts in planning and preparing for the future - this means that people often find and look to us for guidance and advice on what to do with their money. But, unfortunately, we're also sometimes seen in this glorious light - as if we can peer into and see the future in some sort of omnipotent vision. And with all of the responsibilities of being a financial planner or financial coach, it should come as no surprise that people in my profession are often mulling over charts, predictions, and forecasts of every kind, trying to catch a glimpse of what may lie ahead.
I'm sorry to destroy any illusion or burst any bubbles (or shatter any fellow financial planner or financial coach's ego). Still, all of those preconceived notions that we're some sort of fortune teller aren't entirely accurate. Of course, we do our best to observe patterns, follow trends, and make predictions of possible outcomes in the financial world, but those predictions are only accurate to a point. There's no possible way to truly see into the future - and if anyone who wants to handle your earnings, money, or savings says otherwise, don't hesitate to turn on a dime and run for the hills.
However, perhaps as valuable as peering into the future is glimpsing into the past. Maybe we can't tell you what will or won't happen with unwavering confidence. Still, sometimes we can tell you what the results of specific actions may result in. That's a sort of confusing sentence, so let me elaborate. While we can't look into a crystal ball, we can see what other people like you have done and the results of those actions. This is a particularly useful skill for financial planners regarding retirement saving and investing for retirement.
That's why today, we're going to be taking on the task of outlining EIGHT financial mistakes that could seriously cost you in the long run, especially concerning your retirement plan. After all, no one wants to work forever - right? So, without any further ado, let's delve right in and find out the first mistake that could WRECK your retirement!
Failing to Plan
The first major, and yes, I mean MAJOR, mistake of those trying to plan for retirement is just flat out not having a game plan. Think about it… How can you hope to succeed if you don't have any sort of plan? Well, it's nearly impossible unless you're fortunate (like winning the lottery or finding oil on your property). Even if you eventually do manage to hit it big, you might not even know when to stop and smell the roses of retirement without a plan!
Imagine three people. The first person has no retirement plan but has been lucky enough to create a GIGANTIC savings account. They have no plan and thus have no idea that they could've stopped working a decade ago and would be able to feasibly cover their expenses for the rest of their life. The second person has a modestly large savings account. They believe that retirement is just around the corner. Still, they don't realize that their savings will only realistically last them a decade! The third person has a plan for their retirement. They know just how much they need to save to live out the rest of their lives comfortably and even possibly leave a bit of cash for their family. Who would you want to be?
I'm guessing almost everyone would take the third option. But, of course, no one wants to work too long or not save enough - but plenty of people altogether forgo retirement planning - and that's a huge mistake that could have you working longer than needed.
Prioritizing College over Retirement
The next mistake that could WRECK your retirement doesn't come from a place of improper planning. Unfortunately, it comes from a place of love and self-sacrifice! In this day and age, going to college is something that's (wrongly) considered an absolute necessity. It's something that, for decades, we've strived and worked hard to do, sacrificing just about anything so that our kids or we may be able to go to college, get a well-paying job, and carve out their own little stake in the world.
And while college is something that's important for many people, it's not the end-all-be-all of a person or their career! Like I said before, parents are often willing to sacrifice just about anything for their kids to go to college. They'll even pay for college over contributing to their retirement plan. However, this isn't always (and perhaps is rarely) the best option. When it comes to college, proper planning is a must. Finding loans, scholarships, as well as other sources of funds can make the difference financially for you and your potential student. Finding these sources to pay for college is so exceedingly important, not only because it lessens our financial hardships but also because we only have so many working years to contribute to our own retirement.
Not Taking Advantage of Tax-Deferred Saving and Matching
Okay, this one's a little bit more complex! Saving and investing are the key to crossing the finish line for retiring. It's something that we must do and that we have to be smart about while we're doing it. Passing up on your employer's tax-deferred saving and matching programs might end up holding you back a lot in the long run. Just step back and think about it for a moment - we should be saving and investing for retirement anyway, right? And if we're doing that, then it only makes sense to take advantage of your employer's matching contributions!
See, often, employers want to incentivize their workers to save for retirement. They can do this by offering what's called a "matching contribution." This usually means that an employer is willing to put in a certain percentage of whatever you're willing to put in to save towards your tax-deferred retirement. Getting started early is another key to success! The snowballing and compounding effects that saving early has are astounding!
Just think about it like this… if you're willing to contribute $100 and your employer is willing to match half of your contribution, and your rate of return is 5%. Each month, you'll be accumulating a total of $150. Multiply that by twelve months and add your annual interest, and you're already looking at $1,890, not bad for a $1,200 investment. And each year that it continues to sit in your retirement account, you're continuing to earn interest on money you didn't contribute personally!
Combine that with the fact that you're not going to have to pay taxes on that income until you withdraw it from your retirement account. As a result, you're looking at some brilliant savings that will get you to cross the retiring finish line so much faster!
Not Adjusting Your Plan as Retirement Nears
With all of this smart saving and planning going on, the last thing you want is for something uncontrollable, like the stock market, to come in and wreak havoc on your retirement account and investments!
Picture this - you're sitting back after a long day's work and thinking cozily about all of the great work you've done preparing to retire. You have stock, bonds, a great 401k that's nice and full, and everything's going along swimmingly. BUT WAIT… what do you hear on the news? There's a new pandemic, a new war, a new whatever… the talking heads are looking towards the stock market, expecting it to begin plummeting as we fall into a recession!
That's not the news any of us want to hear at any time in our lives; however, externalities do happen, and they ultimately have an effect on our financial bottom lines. That's why it's wise to adjust as the moment of retirement comes closer. We're getting fairly close to where our retirement line will be, so why would we have risky investments filling up our portfolio?
Making simple adjustments with your financial planner is incredibly important. Our portfolio shouldn't be this static thing that we never touch, think about, or tinker with. Instead, it should be a living entity that we nurture to meet its needs so that it can meet ours when the time is right. A good financial planner will be able to recognize this and make the necessary adjustments while keeping your risk profile in mind.
Frequent Trading and Chasing the "Hots"
Okay, I know what I just said - but hear me out. Obviously, we want our retirement accounts, investments, and portfolio to change and adapt as we get close to retirement. We don't want it to become this inflexible thing that we never touch. However, it's also important to not go too far in the other direction either!
Frequent trading, chasing the trends of what's "hot," and honestly just playing the market is something dangerous to your finances that comes with a metric ton of risk. Even if we're far away from retiring, it's crucial to recognize that's it's challenging to make money that way. In fact, there are loads of people who essentially make their living by trying to play the market, and they'll be the first to let you know that it's a full-time job. It's not something that most of us can dip our toes in and out of willy nilly.
The truth is that there are people out there who will be making a good bit of money by chasing what's hot on the market and buying and selling stocks. However, where there's a high reward, there's also a high risk. The goal with retirement shouldn't be to do a couple of hat tricks and get rich quickly, risking everything in the process. Instead, we should rely on sound financial principles to pave the way for a healthy approach to our personal finances and retiring.
Overlooking Healthcare Costs
So far, we've talked a lot about things to do and things not to do. However, there's something left unspoken - and that's to plan for what's out of our control!
You're buzzing along and contributing to your retirement account one day, and all seems well. Then out of nowhere, BOOM. You're hit by another driver, or you get a mysterious illness that ends you up in the hospital. All of a sudden, we're dipping into our retirement account or stopping our contributions so we can pay our medical bills. That's not a great feeling, and it'll set you back quite a bit in your plan.
Let's face it, emergencies are going to happen! There's no avoiding it; even if you stay indoors and live the safest life possible, our bodies will eventually betray us in one way or another! That's why it's imperative to plan for emergencies ahead of time. We can do that by creating an emergency fund where we can allocate money for emergencies and otherwise not touch it. That's the safest and most surefire way to ensure that no medical emergency or healthcare cost will interrupt our retirement savings plan.
Retiring with Too Much Debt
Debt is yet another bump in the road of retirement! While that new car or expensive house may sound like a great idea at the time - it's important to remember these are things we will have to pay for over a long period. So we don't want to be stacking up a ton of debt on top of what we already have before retirement.
One monthly payment here, another monthly payment here, a car note there, a mortgage payment there… it all stacks up. It can be incredibly overwhelming even when we're employed and making a lot of money in our golden earning years. Now imagine how much worse all of those payments will hurt when we're no longer making money!
Before you retire, it's a good idea to minimize debt, that way, we're maximizing the amount of money we have to live on for the rest of our lives.
It's Not Only About the Money
Alright! We're at our last point that could wreck your retirement plan! There's a lot in this piece about money, saving, investing, debt, and emergencies, but what about YOU? There's no point in saving for your retirement if you're not going to be around to enjoy it! Just think about all of those years where you're working your tail off to get to where you want to be… that all can't be for naught.
Arguably the most important factor to consider when planning for your retirement is to invest and then reinvest in yourself. Eat healthily, go on walks, and keep up with your doctor's appointments. It's essential that you're there to enjoy the golden years of retirement. You owe it to yourself and your family to take care of yourself and become a great example of what we strive to achieve!
Even outside of physical health, mental health and intellectual health are also very important! Make sure you're staying involved in your community! Join clubs, eat with friends, and don't let yourself get so bogged down in everyday life that you forget to live!
If you or someone you know is working hard towards retiring, please call or email to schedule an appointment with me. I'll work with you to create an active, adaptive plan that'll help you get where you want to be so you can best enjoy your golden years.
Together, we can create a financial plan that gets you where you want to be!
Until next time...this is Melissa Making Cents!
Melissa Anne Cox, CERTIFIED FINANCIAL PLANNER™, is a College Planning and Student Loan Advisor and Financial Coach in Dallas, Texas.