It is a dream to achieve our goals for retirement, to be able to do the things we want to do without having to worry about our finances. Do you?
Maybe you love the 9-5 grind at Corporate Employee. Or maybe you’re perfectly comfortable not knowing if you are able to pay for your medical expenses, should you ever need medical assistance. Perhaps you enjoy the sleepless nights caused by worrying over bills.
If that describes your current journey, you wouldn’t be the only one who may have to accept a lower standard of living through retirement.
Online real estate education platform, Clever Real Estate, performed a survey in which 1,500 Americans in 2020 in regard to their retirement funds, debt, and financial concerns. The survey found that the average retiree only has $177,787 in retirement funds. This figure is far lower than most recommended savings targets.
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A widely-accepted rule of thumb is to have saved around 8 times your salary by ages 60-65. To put that into practice, someone earning a salary of $55,000 should in theory have $440,000 by the time they enter retirement.
If your goal is to fall short of that goal, it’s quite easy to achieve. Here are 8 easy ways to miss your ideal retirement.
Constantly postpone saving for retirement
Admit it, we all procrastinate from time to time. At best, procrastination means arriving late to an appointment or letting the weeds grow a little too high. At worst, it can monumentally decrease the odds that you’ll be able to retire.
The moment at which you start saving is one of the most influential factors in building wealth. The more time your accounts have to undergo compound interest, the more they will grow through time.
Here is an example of the difference in ending balances by age 60, if you had saved 15% of your $55,000 salary, since ages 25, 35, and 45.
Comparing a starting point of 25 versus 45 in the example shown, the difference is $823,783. In a nutshell, the later you begin saving for retirement, the worse off you’ll be.
Set it and forget it
The most positive way to build your wealth is by saving. Saving is more important than investment performance.
The annual 401(k) contribution limit is $19,500 (2021). But those of age 50 and older, benefit by catch-up contributions, allowing them to save an additional $6,500 per year, totalling allowable annual contributions of $26,500 (2021).
Of course, you are not required to meet the maximum contributions for your accounts. In fact, most people never come close to contributing as much as they had in mind. Instead, a common mistake is to set a low contribution amount early in your career, and never dial that figure up, as you climb up the ladder. Set it and forget it.
Increasing your savings amount is greatly influential over time. In the example below, consider how much of a difference just a 5% savings increase can have, here are the ending balances from various savings rates on a $55,000 salary over the course of 35 years (assuming a 6.5% annual return).
If you establish a low savings rate, it is obvious that you can only expect a low savings amount.
Little, or too much investment risk
The idea behind putting money into your savings is for investment purposes, in order for it to grow. However, growth isn’t free. You have to carefully choose investments that offer a reasonable enough return to meet your retirement goals.
Referencing our previous example of a $15 savings rate with a $55,000 salary over 35 years, there is a significant difference in the ending balances if we assume a 3% rate of return, compared to 6.5%. The ending balance is reduced by more than half.
If you don’t wish to pursue a reasonable rate of return, you could do one of two things: play it really safe, or take on high investment risk. Stocks have historically outpaced inflation and demonstrated larger returns, than more conservative investments, such as bonds. As a riskier investment class, stocks tend to suffer greater losses, meaning you could lose more money as a result of taking on too much risk. On the other hand, investing too conservatively might mean that you might not be able to earn a sufficient return to grow your money considerably.
Generally, it is recommended that you invest aggressively early in your career, and gradually moderate your allocation as you approach retirement. That is, if you actually want to retire.
It’s not possible to save for retirement if you spend all your money, or spend more than you actually have. Great levels of debt will certainly put an ideal retirement out of reach.
Unfortunately, too many people drag significant debt into retirement, which is dangerous, assuming you live on a fixed income. Per the Employee Benefit Research Institute’s 2021 Retirement Confidence Survey, half of employees state that their non-mortgage debt negatively impacts their ability to save for retirement in general, while 4 out of 10 say it negatively impacts their ability to contribute to a workplace retirement plan. Furthermore, more than half of workers and nearly a third of retirees call debt a problem for their household.
If you want to fund the lifestyle of credit card company executives rather than your own retirement, consider this the perfect way to go.
Financial plans have been proven to enable people to save more for retirement. A study by HSBC found that those with a financial plan accumulated nearly 2.5 times more retirement savings than those without a plan. According to the Charles Schwab Modern Wealth Survey in 2021, more than 50% of Americans with a written financial plan report feeling “very confident” about their ability to reach their financial goals, compared to only 18% of those without a formal plan.
A comfortable retirement lifestyle requires detailed planning. Anyone who prefers financial surprises can simply skip this step, and improvise.
Cash out at the 401(k) ATM
Early withdrawals and loans against your 401(k) are the equivalent of taking steps backward. Any time you take money away from your retirement accounts to pay for current expenses, you are guaranteed to have less money in retirement. Not only does this reduce your balance, but your accounts also miss out on potential earnings due to compounding.
Additionally, withdrawals are taxed at your ordinary income tax rate. If you are under the age of 59 ½ , you could potentially be subject to a 10% early withdrawal penalty.
Rely solely on Social Security and Medicare
Social Security is a key source of income for almost every retiree. The EBRI retirement confidence survey reports that over 90% of retirees state that they have identified social security as their top source of retirement income.
In addition, social security is a replacement for only a portion of your income. It can be ridiculously low for high-income earners. The estimated average monthly social security payment in 2021 is roughly $1,543. For most people, that will not be sufficient to meet all of their needs in retirement, especially when you account for increasing health care costs.
Two common myths about Medicare are that it is completely free, and will cover all medical expenses. In fact, there are premium costs associated with the original Medicare programs. Part A, and Part . Additionally, you will likely have to find additional coverage for things Medicare doesn’t cover, such as prescription drugs, dental work, vision treatment, and long-term care.
Those who believe that social security and medicare are enough to live through an ideal retirement, are in for a surprise.
Questionable Financial Advisors
When you reach a certain age, you should expect to be invited to dinner, on plenty of occasions. This happens because companies hope to sell you on financial products by first winning you over with fancy dinner seminars. Obviously, not all of them are bad, but you should be careful. Remember that financial professionals are not all cut from the same cloth.
For example, registered investment advisors (RIAs) are regulated under the fiduciary standard, meaning they are legally mandated to always act in their clients’ best interest. Other types of financial professionals, such as stockbrokers and advisors under insurance firms, are non-fiduciaries. These kinds operate very differently than fiduciary advisors, from their fee structure, to how they disclose potential conflicts of interest.
Questionable advisors may try to sell intricate financial products, such as annuities, which often come with multiple layers of fees, restricted access to your capital, and penalties for early withdrawals of your money.
But if you really enjoyed dinner and feel bad for eating on their dime, you go ahead and buy what they’re selling, just don’t expect it to guarantee you a comfortable retirement.
If you decide that you want to have a successful retirement, you should generally do the complete opposite of the steps mentioned above. If you’re guilty of some of these steps, the good news is that it’s not too late to get on the right track.
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The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.