Retirement should be carefree, but for many it’s not. Today’s economy, and the constant downward pressure on yields is destroying Americans’ ability to generate income on their savings. Here’s what you need to be aware of.
Don’t overspend in retirement. In fact, if you’re nearing retirement, you should be scaling back your spending so that you don’t end up committed to a lot of discretionary expenses going into your golden years.
Retirement mistakes like these are what sink ships and cause seniors to have to go back to work – not because they want to, but because they have to.
Try to keep your debt to income ratio below 40 percent at least 10 years leading up to retirement. And, 5 years prior to retirement, pay off as much as you can. The less you’ve committed yourself to, the better.
Don’t Depend On Being Employed Beyond Your Normal Retirement Age
Normal retirement age is between 65 and 70. If you’re working beyond that age, consider yourself lucky. No, really. When AARP did a study on the number of baby boomers that believe they’ll be able to return to the workforce if they have to, 79 percent of those surveyed believe they will be able to go back to work.
Yet, the Census Bureau shows that only 12 percent of seniors work after age 65. There’s a disconnect there. Don’t deny the reality of your health either. Many people don’t go back to work because they can’t. They don’t have the energy to, they have a health problem that prevents them from doing so, or they can’t find an employer willing to hire and train them.
Many employers see older individuals as a risk, not an asset. And, for better or worse, health problems come with age and you have to be accepting of that fact.
Don’t Underestimate Your Life Expectancy
Most people (especially the DIY’ers) believe they will “die young.” And, by young, they don’t assume they will live beyond maybe age 80, so that’s what they use to plan out their income. Bad idea.
If you live to age 65, your life expectancy is 88.8 for females and 86.6 for men.
And, remember, there are still many people who live beyond those expectancies. If you make to that age, your life expectancy increases again. You don’t just drop dead in the middle of your 86th year of life.
Don’t Underestimate Planning Necessary For Your Own Parents
Believe it or not, there are many laws on the books that will force you to take care of your indigent parents. And, many people don’t plan for these expenses. Your parents might be depending on you to take care of them.
If you haven’t had a discussion about their plans for old age, have that discussion now.
Don’t Bee Too Optimistic About Your Investments
Most people don’t think about saving money and investing until it’s too late to make dramatic changes to their financial plan. A long-term rate of return over 9 or 10 percent isn’t really realistic, according to Warren Buffett.
And, if you are doing the classic 60/40 split (60 percent stocks, 40 percent bonds), a realistic long-term return might be closer to 6-7 percent. And, that is before inflation.
If you’re banking on higher returns, you’re going to have to rely on higher risk investments at a time when you need safety of principal and interest for income.
Don’t Underestimate Health Care Expenses
Health care expenses make up a significant portion of seniors’ expenses. According to Fidelity Investments, a 65 year old couple retiring today will need about $240,000 just to cover future medical costs.
That doesn’t even cover long-term care. It also doesn’t take into account any additional expenses if you decide to retire early before your Medicare plan starts. What do you get for $240,000? That’s the cost of deductibles and copayments, and premiums for optional coverage for doctor visits and prescriptions.
If your savings doesn’t cover this, it’s time to rethink your savings plan.
Allen Foster brings a wealth of experience when it comes to financial planning and strategies. He enjoys the opportunity to share his insights and advice online. His tips and general suggestions have been aired across a number of different websites.