Virtually everyone looks forward to retiring as early in life as possible. The idea is to have as many years as possible to enjoy the many things that had to be put off during the working years. However, far too many people don’t take the steps necessary to ensure they’ll have enough money to live comfortably after retiring. There are five distinct ways people can ruin their chances of retiring in comfort.
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Failing to Plan
Saving for retirement isn’t always easy, but it is certainly possible for the majority of people. Even those with relatively low incomes are generally able to save some money if they’re motivated to do so.
The problem facing most people is how much to save and what vehicles to use to boost earnings from the money saved. There is no simple, one-size-fits-all approach to saving, meaning the best approach is to explore different types of investments and use the ones that best fit the existing conditions.
Plan to move savings from one vehicle to another at different points in life. Younger wage earners may be comfortable with riskier investment strategies, but the majority of people nearing retirement age are less inclined to take unnecessary risks. As a rule, it pays to work with an advisor to determine which investments are appropriate at different times.
- Spending too Much During Peak Earning Years
While it’s tempting to take nicer vacations or purchase new vehicles often, doing so is not going to make those retirement savings grow. During peak earning periods, it’s easy for most people to convince themselves a splurge or two won’t dramatically impact the net earnings of a retirement account. However, that vacation this year tends to lead to another next year, and once that money is spent, there’s no way to get it back.
That’s not to suggest taking a vacation isn’t important or that replacing an aging vehicle isn’t a good idea, because those things are, indeed, important. The problem comes in when long, expensive vacations or luxury automobiles are purchased at the expense of saving money for retirement.
- Disregarding Common Savings Advice
It’s quite common in the U.S. to save little or no money for years at a time. When savings are not consistent, the power of compounding interest is lost. Certainly, interest will be applied to money invested in savings, but something almost magical happens when money is added to savings regularly and the earned interest keeps multiplying.
Here again, it’s important to understand that saving for retirement requires a variety of investment vehicles to accomplish the end goal. Advisors will typically suggest savers look beyond IRAs or 401(k)s when exploring ways to garner the best return on investment.
- Being Realistic When Evaluating Your Portfolio’s Value
Far too many investors look at the value of a portfolio today and gauge their savings solely on that figure. However, there are too many variables involved to use a simplistic approach for estimating the future value of a portfolio. While long-term averages are certainly tools to use when planning for the future, it’s also important to understand economic downturns and other factors can quickly erode the value of a portfolio, which also means the future earnings of that portfolio will be impacted.
Investors must always be willing to re-evaluate a position and look for better ways to generate earnings for a portfolio if the current holdings are failing to generate the anticipated return on investment. If real estate values lag, for example, it might make more sense to shift money to other investments. That’s not to suggest moving out of a particular investment category simply because of a short-term decline in value is always a good idea. As always, it pays to discuss the advantages of any investment shifts with a financial planner before taking any actions.
- Overestimating Total Lifetime Earnings
During earlier years, people focus on paying off a mortgage, putting children through school, and purchasing consumer goods like electronics and clothing. They assume there will be money later to take care of retirement account needs, but unexpected events frequently create additional issues.
The recession of 2008 is a good example. Real earnings took a nosedive for many people, making it difficult for them to repay debts let alone add money to retirement savings. Many savers have found it impossible to continue saving money even today, suggesting retirement savings are not growing as they need to.
It’s Time to Be Proactive
Regardless of your current earning level or the amount in savings, now is the time to look for better ways to manage retirement savings. There are simply too many things that could happen before retirement age is reached to threaten your ability to retire in comfort.
Illnesses, the death of a spouse, or the loss of a job are common occurrences, and everyone needs to be prepared for the unexpected. That means exploring new and innovative ways to save money for retirement and manage the money that’s already put aside.
Even for those who reach retirement age without significant incidents interrupting their savings plans, it’s becoming more difficult to count on investments earning the returns needed to live comfortably. Although there is no way to predict the future with certainty, investment advisors routinely suggest taking steps to improve your position now and being alert for changes in the economy that suggest the need for further strategy adjustments.
Investment advisors assist clients not only as they plan for retirement but also to adjust investments after retirement to garner the best returns possible. Will the economy improve in the coming years or remain somewhat stagnant? No one really knows, but planning for any potential contingencies will certainly be more productive than ignoring events as they happen.
Whether you’re 25 or 50, now is the time to take a more proactive approach to managing your money to better ensure a happy retirement. If you’re unsure where to start or how to improve your portfolio, working with an investment advisor is always recommended. Regardless of your current situation, it’s crucial to take steps now to make sure your retirement income will be there when you need it.
About The Author
Matthew Paulson is the founder of MarketBeat, an Inc. 5000 financial media company that empowers retail investors to make better trading decisions by providing real-time financial data and objective market research. Visit his website: www.mattpaulson.com
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