By Darren Zagarola of EKS Associates
#1: Believing it is Too Late to Start Planning and Saving
It is never too late to develop good habits and start saving for retirement. You do not have to “go without” to save. Every little bit helps, especially if you can take advantage of compounding interest. Start with a written plan that includes realistic savings goals and a budget to help you understand where you are spending. You may discover you do not have to make significant changes to your lifestyle, or you may realize that you need to delay some of your goals. But the longer you wait to start saving, the less you will have available to meet your retirement needs.
#2: Not Taking Advantage of Retirement Plan Provisions (e.g., Catch-up Provisions or Company Matching)
Now that your income is higher and your kids may be out of college, this might be the first time in years that you have excess disposable income. Also, at age 50 (or older), you become eligible to take advantage of “catch-up contributions.” This means the maximum amount you can contribute to your employer-sponsored retirement account is $26,000, or $6,500 more than you could at age 49.
If your budget allows for it, we recommend contributing the maximum allowable to your retirement plan. Some employers offer to match a portion of their employee’s contributions. If you cannot maximize your contribution, we recommend at least contributing enough to meet the company’s maximum contribution.
#3: Withdrawing Money Too Early from Retirement Plan Accounts
Retirement plan accounts are intended to provide for your needs later in life. You should avoid taking funds from your retirement accounts before age 59½, as there is a 10% penalty on the amount withdrawn in addition to the income tax on the distribution. For example, if you are in the 22% tax bracket, an early withdrawal of $10,000 from your retirement account would result in $3,200 in taxes and penalties or fees. Consider other methods of financing.
#4: Investing in Your Children Instead of Yourself
We all want our children to succeed. For some, this means giving them the gift of graduating from college debt-free. Paying for a college education is a noble endeavor. However, if you choose to fund their education at the expense of your retirement, you may have difficulty making up the difference. Not having enough money to retire may result in needing to alter specific goals, such as your age of retirement or lifestyle during retirement. Remember, it is easier to borrow money for college than it is for retirement.
#5: Not Factoring in the Cost of Adult Children or Aging Parents
You are affectionately known as the “sandwich” generation, supporting adult children as well as aging parents. This may reduce your ability to save for retirement or cause you to withdraw retirement assets early. It is a difficult position to be in and can have a dramatic effect on your plan. We recommend having a discussion with your parents about their financial plans. Understanding what will happen if they require long-term care will help you prepare for the possibility of having to support them.
#6: Investing Too Conservatively
Retirement is close enough for you to taste. It may be your biggest goal, but it is not the end goal. You still have 25-30 years of living to do. And in the early years of retirement, you may be increasing your living expenses for travel and other lifestyle changes. To keep pace with inflation, you still need exposure to equity investments. Having too conservative of an allocation could decrease the purchasing power of your portfolio in the future. Being too aggressive puts your savings at risk. Therefore, you need to balance the risk/reward of your portfolio through proper asset allocation. Building a well-balanced portfolio can be complicated, and it’s advisable to work with a trusted financial planner who can illustrate how different scenarios can impact your short- and long-term objectives.
#7: Eliminating Good Debt vs. Bad Debt
You are most likely earning more now than in previous decades. If you have been able to control your expenses, that means you have additional savings that can be used to further your goals. This may include paying down outstanding debt, including credit cards, student loans, or a mortgage.
Consumer debt and student loans typically have higher interest rates than mortgage debt and should be paid off first.
Most mortgages have a term of 15-30 years, and you are probably more than halfway through the repayment period. As you approach the end of the mortgage term, your monthly payment is allocated more to the principal than interest. If you use your excess cash flow to pay down the mortgage now instead of using it to accumulate assets for retirement, you may not achieve your long-term goals. Or worse, you may need to borrow money against the equity in your home later in life and discover you are unable to access the liquidity for certain reasons.
Remember, having a mortgage is not bad. It provides flexibility and liquidity to one’s financial plan, and current interest rates are close to all-time lows.
#8: Failure to Update Your Estate Plan to Reflect Your Current Wishes
If you have not prepared an estate plan, which includes a Will, Power of Attorney, and Advance Medical Directive, you should do so immediately. Assuming you have these documents in place, they should be reviewed every three years to ensure they continue to reflect your wishes.
Circumstances may have changed since the documents were created or last updated, including the value of your estate, who you want to manage your estate, or who you want to act as guardian for your minor children. Now is also the time to consider whether you wish to leave assets in trust for your heirs or leave them outright.
#9: Failure to Update Your Life Insurance Policies
Life insurance policies should be reviewed every five years, or in conjunction with a life-changing event. Common problems we see include:
Term policies purchased early in life might be expiring, yet the protection is still needed.
The financial need for the insurance might not be the same as when you obtained the policy, requiring you to purchase additional coverage, or reduce coverage if you no longer require it.
Beneficiary designations might need to be updated.
Talk with your insurance advisor or financial planner to ensure your policies continue to meet your objectives.
#10: Failure to Plan for Future Health Care Costs and Long-Term Care Costs
Long-term care and health care costs are significant financial risks. More than half of Americans over age 65 will need some form of long-term care, which can be incredibly expensive. Long-term care is custodial care, not medical care, and thus not covered by standard health care policies. Such care can take place in your home, an assisted living facility, or a memory care facility. You should start to consider obtaining a private policy in your mid to late 50s unless you have a family history of illness that would require you to get the policy earlier. The premium cost for a policy increases based on your age and health. There are several options for policies, including traditional individual policy, shared policies covering you and your spouse for a total number of years, or hybrid policies that include long-term-care coverage as a rider on a life insurance policy. We recommend speaking to a specialist in this area due to the complexities of the various policies. Also, you should develop a personal care plan that includes how and where you want to be cared for if the need arises and communicate the plan to family members to ensure your wishes are carried out.