Major Retirement Planning Mistakes
At all costs, major retirement planning mistakes can and should be avoided…just like Caffeine. Caffeine? Yes, caffeine!…Hang in there with me for a minute and you will understand what I’m talking about. When done properly, the process of retirement financial planning should greatly reduce the potential for costly mistakes during retirement. As a veteran in the wealth management industry for more than 20 years, I have witnessed numerous financial mistakes that retirees have made. Usually however, many of the mistakes are actually made before someone retires. Just this morning I received an email from a 19 year old who stated that he is ready to begin saving for his future. My initial reaction was to commend him for having a genuine concern about saving for retirement at the young age of 19.
My response to this young man went something like this:
Greetings! I am happy to learn that you are interested in getting off to an excellent start with your personal finances. I believe that the best place for you to begin is by establishing a Roth IRA for yourself. With a Roth, you can contribute up to $5,500 per year with tax deferred growth potential. By the time you reach age 59 1/2, you can begin withdrawing from the funds that you have saved over the previous 40 years tax free!
Below is an example of how saving $458.33 per month ($5,500 per year) could potentially grow if you receive 8% interest, annual compounding for 40 years.
- Current Principal: $5,500
- Monthly Addition: $458.33
- Years to Grow: 40
- Interest Rate: 8%
- Compound Interest: 1 time(s) per year
- Future Value $1,544,285.36
Hopefully, you get big picture of what saving on a consistent basis could mean for your future, financially. Thanks for your question.
Imagine if we were to fast forward 40 years and this young man is now 59 1/2 and let’s say that he began saving for retirement at age 40. Using the same annual saving of $5,500 compounding at 8% here’s how his situation would look:
- Beginning Balance: $5,500
- Annual Addition: $5,500
- Years to Grow: 19
- Interest rate 8%
- Compound Interest: 1 time(s) per year
- Future Value: $269,927.16
The difference? -1,274,358.20!
A very common occurrence is people who wait many years before they begin to save for retirement. In many cases, this is the result of lifestyle choices that people make. I get it, it’s difficult to think about downsizing after you have had more children…or after you just received a nice pay increase.
Everyone wants to enjoy the fruits of their labor. All the more reason why budgeting is critical to achieving financial success. I like to think of budgeting as truth serum.
For example, if you drink coffee and have a daily Starbucks habit, then maybe you should consider brewing coffee at home and bringing a large cup to work with you instead of purchasing a large cup of coffee at more than $4.00 a pop!
Quick math: $4.00 per cup of coffee x 5 days per week x 4 weeks per month x 12 months per year = $960.00! That is 17.45% of the contribution maximum of $5,500 per year that you could save in a IRA!
Now, let’s apply a little time value of money truth serum. If you were to save $960 annually (instead of making a daily donation to your favorite overpriced chain coffee shop) for 19 years and earn 8% annual compound interest, you would have an additional 42,971.49! Time to think twice about that once per day coffee habit? Now, if you have a twice or three times per day ‘chain coffee shop’ habit, then we REALLY need to talk!
Yes, this does have an impact on your retirement. It isn’t just about having the proper asset allocation, not falling for the latest vacation club scam, owning fixed income at the start of a recession, driving a Yugo instead of a Mercedes (did I just date myself by saying, “Yugo”?) a daily trip to the overpriced chain coffee shop can certainly erode your retirement nest egg over time.
FULL DISCLOSURE: I speak from experience because about 12 years ago, I used to make a daily (okay, maybe twice per day) trip to an overpriced chain coffee shop for a large cup of Chai. After about 5 months of making one and two trips per day to the coffee shop, I kicked the habit. Let’s be clear, there isn’t anything wrong with a good thing, but too much of a good thing” isn’t always good for us. Moderation is the key…including perhaps owning your own coffee maker!
There are many other mistakes that retirees make. Our firm is committed to helping as many people as we can to make it across that finished line called “Retirement” and enjoy the life that follows. If you would like to learn more about how “Major Retirement Planning Mistakes” and how to avoid them, view the following video of my appearance on ABC/News Channel 8 here: https://www.youtube.com/channel/UCmUGfT4USv7ITLCQ_xdj25A
Martin A. Smith is a MD Fee-Only Financial Advisor and the President of Wealthcare Financial Group, Inc. a retirement planning and investment advisory firm.