Mistake #1: Not preparing a budget and cash flow for retirement:
To my dismay, when first meeting with new clients I discover that very few of them can produce a written annual budget and retirement cash flow that adequately reflects their lifestyle during a long retirement.
Basic Rule: Before retirement, you must determine if you’ll have adequate income during retirement. If you retire, (that is, you stop working) and your income in retirement doesn’t meet your living needs, then obviously at some point you’ll experience retirement failure. In other words, you could be in danger of outliving your assets.
Many pre-retirees believe they will need less than two-thirds of their current annual income in retirement. Many financial planners suggest that you plan to spend 70-80% of your pre-retirement income. But even that could be understated. Yes, some expenses will drop off after you retire. But many other costs will increase in later life such as the cost of health care. All of which means you could be spending just as much, if not more, in retirement as when you were working.
Mistake #2: Not properly accounting for Inflation:
Proper income planning for retirement requires that you take into account the impact of inflation on living expenses over a long lifespan. Once you retire and you begin to draw down your next egg to live on, you are completely exposed to inflation risk.
As an example: Over a 25-year retirement (which is typical for a married couple) if you need $50,000 per year to cover your expenses when you first retire, then at just 3% inflation, your retirement portfolio will need to generate $100,000 per year (double) to cover your same living expenses 24 years later.
Related Article: Three Mistakes People Make In or Near Retirement – Part II
Many goods and services, that retirees will spend a large portion of their money on, will experience a higher inflation rate over time than the items. Example: Older Americans devote a substantially larger share of their total budgets to health care and long-term care than the rest of the American population. And these two costs are highly inflationary.
Mistake #3: Not planning for longevity:
In the past 100 years, we have made great strides in improving human health and increasing life expectancy. Back in the year 1900, the average American lived just past age 40. Today, average life expectancy in the U.S. has increased to 78.2 years.
Since 1940, we have gained one year of life expectancy every five years. If we keep this pace, by the end of this century, the average American will live to be close to 100 years of age. For couples in their 60s today, there is a 50% chance that one partner will live to the age of 94, and one out of 10 couples will have a partner that lives to be 100 or older.
You need to have a long-term view of how you’re going to use your money. Many financial planners (and online financial planning calculators) ask people to pick a certain age to plan towards. Just planning for a certain period of time and not having a contingency plan for living longer is a big mistake.
Written by: Steve Geist, The Retirement Guy
Financial Strategist – Retirement Plan Specialist