Avoid Making These 5 Retirement Planning MistakesTrevor Gerszt
Retirement planning is one of those things that is necessary for everyone to do, but that everyone hates actually having to do. The myriad options available in terms of investment assets, the multiple firms competing for your business, and the knowledge that making a mistake could costs you thousands of dollars of your hard-earned money puts so much pressure on people that many just want to put off retirement planning as long as they can. That can be problematic, as the longer you put off planning for retirement the more difficult it becomes. But if you’re finally getting serious about taking the steps you need to ensure a comfortable retirement, here are five mistakes you definitely won’t want to make.
1. Starting to Save Too Late
We’ve all heard it before, but it bears repeating: you need to start saving and investing as soon as you can in order to maximize your wealth in the future. If you invest $10,000 and get a 5% average annual return, you’ll have $26,000 after 20 years, $43,000 after 30 years, and $70,000 after 40 years. At a 7% average annual return those numbers become $39,000, $76,000, and $150,000 respectively. Every extra year of compounding growth adds up over time, so the more money you can save up early on, the more it will go to work for you decades down the road.
The best time to start saving was yesterday, but if you haven’t started saving yet, it’s never too late to start. Don’t get discouraged and think that it’s too late to start saving. It’s better to start saving late and still have at least a little bit of a nest egg built up rather than not save at all and have nothing.
2. Expecting Others to Help You in Retirement
Whether you expect to receive a pension, Social Security, or employer-paid medical insurance in retirement, you can’t expect to rely 100% on other people’s promises to see you through retirement. Given the abysmal state of most pension plans, expecting to get pension payments in retirement is rolling the dice with your future. And given the fact that the Social Security trust fund will be exhausted in 2034, you can only expect about three-quarters or less of the Social Security payments you thought you would receive.
That’s why it’s important that you save as much as you can on your own. Whether that’s through a workplace-sponsored 401(k) or IRA, an individual IRA or Roth IRA, or a standard brokerage account, the more money you can save up on your own, the more secure your retirement will be. You can even open a gold or silver IRA, allowing you to invest in precious metals and take advantage of their consistent long-term growth.
3. Saving Too Little
Many people may not fully realize just how much money they’ll need in retirement. Unless you have a budget and know exactly how much money you spend each year, you won’t be able to estimate the amount of money you’ll spend in retirement. You’ll also not want to underestimate the amount of money you’re going to spend once you’re retired. With healthcare costs constantly rising, higher property taxes for those who own their own homes, and inflation continuing to raise the price of food, clothes, and gas, you shouldn’t be surprised to spend more money in retirement than you did while you were working.
That means it’s important not only to invest enough money to last you through retirement but also to invest in assets that will provide steady, consistent growth that you can rely on when you’re retired. While many financial planners move their retired clients into bond-heavy portfolios, don’t forget that gold also delivers steady gains over the long term.
4. Being Too Conservative
The advantage to investing in stocks is that they can offer some pretty amazing returns, as anyone who has benefited from the bull run of the past few years can attest. The downside is that stock markets are prone to cyclical crashes. As those who were heavily invested in stocks during the dotcom bubble and housing bubble know, a stock market crash can wipe out years of returns in a matter of months or even weeks.
Some risk-averse investors may therefore think that they can play it safe by stashing money in a bank savings or checking account, or putting money into a CD. But the interest you might get in a savings account isn’t enough to keep up with inflation, meaning that you’re losing purchasing power every year you keep that money in the bank. Even CDs aren’t earning that much, with the best one-year CDs just barely able to keep up with inflation. By trying to play things too conservative, you could end up missing out on significant amounts of asset growth and hamper your ability to grow your nest egg for retirement.
5. Assuming That Past Performance Will Continue
Over the really long term most investment assets will gain value at a solid but modest rate. But as we’ve seen with stocks, that long-term growth can come with some pretty severe downturns. It’s one thing to expect 7% average annualized growth. But if your retirement happens to come during a bear market, you can forget about making any return at all. The worst recent bear markets were from 1966-1982 and from 2000-2011, both periods in which stock markets began and ended at roughly the same level, with roller coasters up and down in between.
If you had the misfortune to retire during the mid-1960s to early 1970s you wouldn’t have been able to rely on stock markets to maintain your wealth. But at least many retirees back then had pensions that they could rely on. Today the situation is completely different with regard to pensions, so those who retired between 2000 and 2011 and didn’t have pensions but were instead relying on their retirement accounts to fund their retirements found themselves eating their principal in a bad bear market.
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Stock markets have rebounded since then, but 26,000-27,000 for the Dow seems to be the limit for now. The odds are far higher that stocks will drop below 20,000 in the coming years than that they will continue rising to 30,000. And that means that investors who still are heavily invested in stock markets could lose out big. That’s all the more reason to look into investing in gold as a hedge against a financial downturn. Not only does gold act well as a hedge, ever since the gold window was closed in 1971 gold has even outperformed stock markets. That gives gold a one-two punch that other assets can’t come close to matching.