There are many mistakes you can make as you approach and
enter retirement, some worse than others. You might pay higher fees than you
need to, for example, or enter retirement with a lot of debt. But in the eyes
of many people, the single greatest mistake you can make in retirement is
spending too much.
How does it happen?
Many retirees spend too much, but it happens in different ways, and for
different reasons. Let's review some of them.
For starters, many people simply never give enough thought
to how they will live in retirement. They don't estimate how much they need to
have accumulated before they stop working, they haven't assessed their expected
income streams, they don't know how much of an annual income they will need or
want, and they just don't have a plan. Indeed, according to the 2015 EBRI
Retirement Confidence Survey, only 48% of surveyed Americans have tried to
estimate how much they'll need to save in order to have a comfortable retirement.
That's a risky path.
Not having a plan can lead to your choosing to retire
earlier than you should -- and that's another reason some people end up
spending too much and running out of money. It's often underestimated just how
powerful each year of work can be as you approach retirement. If your nest egg
is $100,000 when you're 40, it might grow by 10% over the next year, adding
$10,000. But by the time you're, say, 65, your nest egg might be $400,000 or
$800,000 or more, and a single 10% gain would represent an additional $40,000
or $80,000. Meanwhile, continuing to work can give you more time on your
employer's health insurance plan, reducing your healthcare costs, and it can
result in additional employer contributions to a 401(k) plan, too.
Speaking of healthcare, underestimating how much it will
cost you in retirement is dangerous. There's no way to know the exact ultimate
amount, but the folks at Fidelity have estimated that a 65-year-old couple
retiring now will spend roughly $220,000 on healthcare over the course of
their retirement.
How to accumulate
enough
You can avoid or minimize your danger of overspending in retirement by doing
some thorough thinking and planning well before you retire. Perhaps start with
the widely promoted 4% withdrawal rule, which suggests that you withdraw 4% of
your nest egg in your first year of retirement, and then another 4% each year
thereafter, adjusting the 4% for inflation. That withdrawal rate is designed to
make your money last. You can use the rate to estimate the nest egg you'll need
in retirement by multiplying your desired annual income stream by 25. So, for
example, if you're looking for $30,000 annually to supplement your Social
Security income, you'd multiply that by 25 and would get $750,000.
Knowing how much you need can help you know how much to
sock away, ideally at least partly in tax-advantaged accounts such as IRAs and
401(k)s. Investing effectively is also important -- long-term dollars are
likely to grow more briskly in stocks, so perhaps consider simple, low-cost
broad-market index funds, such as the SPDR S&P 500 ETF, Vanguard
Total Stock Market ETF, and Vanguard Total World Stock ETF.
How to spend less
Aside from accumulating more, you can avoid the great retirement mistake of
overspending by just... spending less. It's not always easy, but some
strategies to consider include keeping your car longer than you planned before
getting a new one, downsizing the household cars from two or more to one,
moving to a less expensive house and/or region, getting a reverse mortgage, and
maybe even taking in a boarder. Being strategic about when you start collecting
Social Security is also smart, as there are many possibilities. Delaying when you
start collecting can result in a bigger monthly check, for example.
If you want a comfortable financial future, be sure to take
the time to plan it. Leaving it up to chance is setting yourself up for
disappointment, or even disaster.
The $60K Social Security
bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your
retirement savings. But a handful of little-known “Social Security secrets”
could ensure a boost in your retirement income of as much as $60,000. Once you
learn how to take advantage of these loopholes, you could retire confidently
with the peace of mind we're all after.
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