And how to avoid them
Provided by Angel McCall CFP®
The American Lawyer recently reported that attorneys at large firms make the same kind of retirement planning mistakes the rest of us do.
That goes to show that even though the best practices of personal finance are well known and in many cases even simple, we all need to be more diligent about informing ourselves and acting on what we learn.
The following are some of the most common mistakes and what you can do to avoid them:
Overestimating future income, underestimating lifespan and overestimating investment returns
Coming from a family of attorneys whose retirement plan was to work until dying at their desk, I am acutely aware of the lack of inclination to save for retirement.
It's nice to know that men and women are expected to live longer than our ancestors. However, if we don't take that into consideration in our planning, our retirement may not be as prosperous as it should be. Many of us will be spending 25 years or more in retirement. Naturally, the longer we live, the more of a nest egg and/or a higher income from retirement plans we will need.
Another important factor is that the expected returns from both equities and bonds are expected to be 2 percent lower than they were 10 years ago, according to investment experts.
Failing to understand retirement savings options
Many self-employed professionals do not know what options they have for retirement. Others who have previously worked for various firms have several small accounts languishing for lack of attention.
Underestimating retirement expenses
One of the most underestimated expenses in retirement is health-care costs. Too many employees believe that Medicare plans with supplements and prescription drug insurance will cover practically all their medical expenses. That is not the case. Statistics show that retirees over 75 spend 15.6 percent of income on health care costs -- nearly double the rate cost of individuals in the 55-64 age group.
Failing to plan for unexpected family expenses
Most families underestimate the costs incurred associated with elderly parents and children. Since your parents are living longer, there is a higher probability they will need financial support. Moreover, if your children graduate college with large student debt, they may need financial support.
Investing too conservatively and/or failing to diversify enough
Too many people maintain portfolios that don't return sufficient income/growth because they are not broad enough. For example, for years many people were over-invested in energy stocks because of prior good performance. Sectors that perform well for a year or too may not continue to do as well. A good example is the health-care industry. Prior to 2016, it outperformed other sectors, but it did poorly in late 2015 and 2016. You need a portfolio that is diversified across multiple sectors.
Too many investors invest too much money in conservative investments earning less than 1 percent to avoid risk. This is a losing strategy even if inflation is only 3 percent. You have to be willing to take some investment risk such as investing in high-quality intermediate bond funds.
Investing too much in a home
Your retirement will be much easier if you enter it without a large mortgage or a home larger than your needs with a large amount of equity. You should consider downsizing prior to retirement, or pre-pay the outstanding mortgage balance on your retirement residence so your housing expense in retirement is reduced.
Please feel free to set up a complimentary consultation with me to discuss options for saving for your retirement.
(Portions of this article reprinted from Chicago Tribune, Copyright © 2017
Alexander Kalina / Dreamstime
Elliot RaphaelsonThe Savings Game)