5 Pitfalls That Can Ruin Your Retirement!
If you are in or nearing retirement, taking care of your money has never been more important. I have noticed many retirement pitfalls from meeting with hundreds of people. I will discuss a few of these later on but, consider the three phases of the financial planning cycle: accumulation, preservation, and distribution. During your working years accumulating as much money as you can for your retirement years is the goal. When you do retire, preserving your hard earned dollars is essential. You don't want to lose what you worked so hard to save, do you? And lastly, when you start pulling money out of your retirement accounts, your focus should be on tax efficiency and longevity.
You want to pay as little tax as possible and, you want your nest egg to last as long as you do, right?
Now let's look at the retirement pitfalls.
Pitfall #1: Underestimating life expectancy. The average woman will live to about age 82 and men will live on average to about 78. So, don't pull too much money out of your accounts each year. On average, it is safe to use 4%-6% each year.
Pitfall#2: Choosing the wrong strategies to achieve financial longevity for retirement.
Is all of your money exposed to market risk? I hope not. The rule of 100 has been around financial circles for years. What is the rule of 100? Take your age minus 100 and that is what would be acceptable to be exposed to the market. So, a 70 year old should have 70% of his money in accounts that will never give a negative return. And 30% would be an acceptable amount to have in the market.
Additionally, it is good to use good old common sense. Any money you have that you can't afford to lose, should not be in the market.
Pitfall #3: Failure to revise plans over time. Again, the rule of 100 should be applied at all times. At age 70, should your portfolio look like it did at age 50? It's not quite as bad to lose money when you're still working, but it can be financially crippling to lose money that you are using to live on. Also, make sure your life insurance is up to date. If you have plenty of life insurance, it gives you more flexibility knowing that when you die your spouse will get a tax free check.
Pitfall #4: Not outpacing inflation on a consistent basis. Inflation has averaged about 3% since 1945. So, if your money is invested too conservatively, you are at risk of losing purchasing power. Another interesting financial rule is the rule of 72. When your investment earns 72% it will have doubled in value. If your money earns 7.2% for 10 years, you just doubled your money. If you are very conservatively invested and only earn 3% a year, your money will take 24 years to double. Well, this rule works in reverse too. In 24 years you will need twice the money you now have to keep the same purchasing power.
Pitfall #5: Dealing with long term care One of the quickest ways to lose your wealth is to have poor health. The cost of staying in a nursing home is around $70,000 per year. That would take a huge bite out of your nest egg, wouldn't it? People like to say, "my kids will never put me in there!" I can tell you most nursing homes are full. Most of the people in there never imagined this would be their fate. You just never know. Having a long care term policy makes sound financial sense.
There are other pitfalls, but I view these as the top 5. Financial planning is like putting a fine recipe together. Leaving out the flour or putting in too much sugar might make for a bad chocolate cake. What would happen if there was an improperly allocated ingredient within the components of your financial plan? For example, do you have too much money allocated in the stock market in these turbulent times? If you take into consideration these 5 pitfalls and a few others, you will be in a much better position during your retirement years. Use common sense and the help of an adviser to make sure you will have peace of mind and financial longevity.
You want to pay as little tax as possible and, you want your nest egg to last as long as you do, right?
Now let's look at the retirement pitfalls.
Pitfall #1: Underestimating life expectancy. The average woman will live to about age 82 and men will live on average to about 78. So, don't pull too much money out of your accounts each year. On average, it is safe to use 4%-6% each year.
Pitfall#2: Choosing the wrong strategies to achieve financial longevity for retirement.
Is all of your money exposed to market risk? I hope not. The rule of 100 has been around financial circles for years. What is the rule of 100? Take your age minus 100 and that is what would be acceptable to be exposed to the market. So, a 70 year old should have 70% of his money in accounts that will never give a negative return. And 30% would be an acceptable amount to have in the market.
Additionally, it is good to use good old common sense. Any money you have that you can't afford to lose, should not be in the market.
Pitfall #3: Failure to revise plans over time. Again, the rule of 100 should be applied at all times. At age 70, should your portfolio look like it did at age 50? It's not quite as bad to lose money when you're still working, but it can be financially crippling to lose money that you are using to live on. Also, make sure your life insurance is up to date. If you have plenty of life insurance, it gives you more flexibility knowing that when you die your spouse will get a tax free check.
Pitfall #4: Not outpacing inflation on a consistent basis. Inflation has averaged about 3% since 1945. So, if your money is invested too conservatively, you are at risk of losing purchasing power. Another interesting financial rule is the rule of 72. When your investment earns 72% it will have doubled in value. If your money earns 7.2% for 10 years, you just doubled your money. If you are very conservatively invested and only earn 3% a year, your money will take 24 years to double. Well, this rule works in reverse too. In 24 years you will need twice the money you now have to keep the same purchasing power.
Pitfall #5: Dealing with long term care One of the quickest ways to lose your wealth is to have poor health. The cost of staying in a nursing home is around $70,000 per year. That would take a huge bite out of your nest egg, wouldn't it? People like to say, "my kids will never put me in there!" I can tell you most nursing homes are full. Most of the people in there never imagined this would be their fate. You just never know. Having a long care term policy makes sound financial sense.
There are other pitfalls, but I view these as the top 5. Financial planning is like putting a fine recipe together. Leaving out the flour or putting in too much sugar might make for a bad chocolate cake. What would happen if there was an improperly allocated ingredient within the components of your financial plan? For example, do you have too much money allocated in the stock market in these turbulent times? If you take into consideration these 5 pitfalls and a few others, you will be in a much better position during your retirement years. Use common sense and the help of an adviser to make sure you will have peace of mind and financial longevity.
