Some financial planning experts believe retirement could be the longest phase of your life. Whether it is or not, all experts would agree retirement planning is important. But there are a few common retirement planning mistakes that many people make that you could easily avoid.
Before outlining common retirement planning mistakes, we need to set the stage.
What is retirement planning?
According to Investopedia, retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve those goals. Retirement planning includes identifying sources of income, estimating expenses, implementing a savings program, and managing assets and risk.
So, what are the most common retirement planning mistakes?
1. Not saving enough for children’s college tuition
Many people underestimate tuition costs needed for their children’s college. When your child is ready to go to college, don’t get caught scrambling because you haven’t saved enough money. Unprepared parents start dipping into their retirement savings to finance their children’s education. Scaling back on 401(k) contributions is one way these parents put their kids through college. Don’t get caught making this mistake.
2. Not planning early enough for children’s college tuition
It’s important to plan for your children’s college tuition sooner rather than later. Work with a financial planner to prepare a solid plan for college. Time can work to your advantage or disadvantage depending on how much of it you have. Check out this example to see why.
Let’s say in 30 years you want to have one million dollars in savings. If you save ten thousand dollars annually and you’re earning five or six percent on your money, you will have one million dollars in 30 years!
Now, let’s cut the amount of time in half. Too many people assume they just have to double their savings and put away twenty thousand dollars annually. Guess what, it’s not twenty thousand. It’s actually thirty-seven thousand dollars! Why? Because you missed out on the five or six percent you were earning on your money for the extra 15 years.
This example shows you why it’s beneficial to start saving for college sooner rather than later. The more money you have saved the less chance you’ll have to dip into your retirement savings. Remember, the longer you wait, the worse it gets.
3. Not taking into consideration income taxes
Let’s go back and tweak our example. In this case, you’re saving for retirement through your 401(k) plan. However, one million dollars inside a pre-tax account is not really one million dollars. Why? Because when you take it out, you’ll have to pay taxes. Your dollar amount could go down to eight hundred thousand after taxes. So, it’s important to take that into consideration when planning for your retirement. You’re going to want to save additional funds to account for the taxes you’ll be paying when you’re ready to take out the money.
4. Not taking Inflation into account
If you talk to elderly people who have been retired for years, most will tell you they’re surprised how much more things cost now than when they first retired. Don’t forget to account for inflation when planning your retirement. Inflation can have a major impact on how much you need to save. So make sure you use realistic factors and plan accordingly.
To avoid these four common retirement planning mistakes, remember to work with a financial planner, start saving early, and don’t forget to account for taxes and inflation. Learn more by listening to our podcast.