Those are two very different goalposts to shoot for. If you don’t choose the right path, you could end up making a costly mistake and running out of money. That’s why saving for retirement is so critical if you want to maintain your current lifestyle.
Plus, you’ll likely want to do things that you didn’t have time or money for when you were working—travel, entertainment exercise, and so on.
The best you can do is become a savvy investor, spend money wisely, and avoid costly retirement mistakes. Let’s take a look at a few.
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A recent survey¹ of American savings habits came back with some dismal results. Fifty-six percent admitted to saving only $10,000 for retirement and one-third said they have no retirement savings.
It’s likely that a similar percent of people facing retirement age probably don’t have a spending plan either. A spending plan is fairly cut and dry. Let’s assume, for example, that you will need to withdraw $30,000 per year from your retirement savings starting with year one.
Assume that you retire at age 65 and live to 85. A simple calculation (20 x $30,000) clearly indicates that you will need at least $600,000 in available funds from all sources, including Social Security.
If you haven’t saved enough to fund your spending accounts, you may have to take on a part-time job, save more money, or cut back on spending. Some experts even recommend postponing retirement until age 70.
2. Not contributing enough to your retirement plans
If you have an IRA or 401(k) account and aren’t making the most of their tax advantages, you are doing yourself a disservice come retirement time because contributing to IRAs and 401(k) accounts has the added benefit of reducing your taxable income—in addition to providing you with a way to grow your money. If you are age 50 or older, you can contribute up to $6,500 per year using pretax money.
If you have a 401(k) account and are age 50 or older, you can contribute up to $24,500 per year pretax. If you own a Roth IRA, contributions are taxed initially but your earnings grow tax-free.
3. Underestimating healthcare expenses
According to a Fidelity Investments study², a 65-year-old couple retiring today should be prepared for $275,000 of out of pocket healthcare expenses—not including expenses for catastrophic illnesses.
Ways to keep these expenses from dinging your nest egg include holding off collecting Social Security, saving more aggressively, and trying to maintain a healthy lifestyle.
4. Underestimating how long you’ll live
According to government statistics, life expectancy in the U.S. leaped from 47 years in 1900 to 75 in 2000—an increase of 28 years. Now, imagine your $30,000 retirement spending budget stretched out over 28 years. You would have to save $840,000 for living expenses—$240,000 more than if you lived eight fewer years.
5. Neglecting to sign up for Medicare
You are eligible to receive Medicare benefits when you turn 65, but you can actually sign up anytime within the three months prior to or following your 65th birthday.
Waiting to enroll in Medicare could cost you higher premiums for Part B coverage—10 percent more each year by some estimates. In the event you don’t have any health insurance and wind up in the hospital, it could cost thousands depending on why you had to go to the emergency room or whether you were admitted for an overnight stay.
The good thing is if you apply for Social Security benefits by the time you reach age 65, you are automatically enrolled in the Medicare program.
6. Taking Social Security too soon
You can begin taking Social Security as early as age 62, but the longer you wait, the higher your monthly benefit will be. Payouts grow by 8 percent each year until you reach age 70.
If you can wait that long to claim benefits, you’ll maximize the benefit to your advantage. Financial factors like your health, marital status, and financial well-being should help you decide when to claim benefits.
7. Ignoring how inflation affects your budget
Inflation is one of those things that you can’t control, but it can have a significant effect on your purchasing power and how much you spend from year to year.
For example, inflation was as high as 13.5 percent in 1980 but dipped to -0.36 percent during the Recession in 2009. If an item costs $2,000 in today’s dollars, it might cost $3,000 in 20 years, depending on inflationary forces.
The thing to keep in mind is that even though you may have arrived at a figure you need to live off of during retirement, if inflation rises significantly and steadily over time, you will actually need much more money to buy the same goods and services. Conversely, you may need less if inflation declines over time.
The point is to save as much as possible in order to weather unforeseen economic developments and avoid costly retirement mistakes.
References
¹ http://time.com/money/4258451/retirement-savings-survey/
² https://www.fidelity.com/about-fidelity/employer-services/health-care-costs-for-couples-in-retirement-rise