If you want to have a successful retirement, understanding that it doesn’t happen by accident is key. To achieve success in retirement, you have to plan effectively in advance. In this article, we’ll cover why most people get retirement planning wrong, especially when they attempt to do it alone. Be sure to read all the way through to learn how to win in retirement!
Top 7 Things Most Retirees Get Wrong When Planning For Retirement
Underestimating the Importance of Longevity
When planning for retirement, many people assume they won’t live as long as they might actually live. It’s easy to look at your retirement plans and assume you won’t make it into your nineties and beyond. However, it’s crucial to plan so you have enough wealth and cash flow to outlast you. This enables you to leave money for your loved ones or avoid becoming a financial burden. When you make your retirement plan, don’t underestimate the importance of longevity.
This also applies to Social Security timing. The money you stand to receive from Social Security is massive, so you want to factor longevity into your Social Security claiming strategy.
Ignoring Inflation
In recent years, we’ve experienced high inflation in the United States. Prices for services and goods have gone up significantly. Due to these increasing prices, inflation has been more apparent in recent history than in the past. Despite this, many people preparing for retirement forget to factor inflation into their plans. Your budget should account for inflation over time. At REAP Financial, we recommend planning for a 3.5% rate of inflation, reflecting the 100-year average.
We always stress that inflation does not make you broke, but it may reduce your lifestyle and standard of living. If you want to maintain or increase your standard of living in retirement, accounting for inflation is essential.
Being Overly Optimistic or Pessimistic About the Market
Since your retirement plans will revolve around expected returns for your portfolio, we encourage our clients to maintain a neutral outlook on the market. For example, assuming a 10% annual return on your retirement portfolio may leave you unprepared if the market underperforms. It might be better to assume a more modest 5-6% rate of return, so your estimates are conservative.
On the opposite side, we don’t want you to be overly pessimistic either. Many people make investment decisions out of fear, driven by emotions. You should aim to avoid letting emotions dictate your financial decisions. This is one of the crucial services we provide at REAP Financial, helping clients remove emotions from their financial decisions.
Not Understanding Social Security and the Importance of Timing
This was mentioned briefly above, but it’s so important that it’s worth mentioning twice. You need to have a strategy concerning when you’ll take your Social Security, based on your expected longevity. Today, more and more people are in a position where they might benefit from not waiting to take their benefit. While this strategy isn’t suitable for everyone, a general rule of thumb is that individuals with a net worth exceeding $2-3 million may find it advantageous to claim Social Security early. This is an analysis we do for our clients at REAP Financial to give them confidence in their Social Security claiming strategy, since it’s such an important part of overall retirement planning.
Not Preparing for Healthcare Costs
In retirement, healthcare costs are expensive, and they need to be built into your budget. When we’re considering Medicare in particular, Medicare premiums are determined by your income. That means you may be paying hundreds more for your Medicare coverage, depending on your income. You’ll also want to consider potential long-term care, nursing home care, and home healthcare costs. Although these situations are difficult to think about, later-life care expenses can rapidly diminish your portfolio due to increased drawdown rates and associated tax implications. For these reasons, it’s important to understand the short, medium, and long-term healthcare costs you’ll face in retirement.
Overspending Without a Budget
The most important number in your retirement plan is your budget. If you don’t have a budget, you risk depleting your portfolio too early. We strive to ensure your budget aligns with what your portfolio can sustain through the years. Budgeting isn’t as critical when you’re working, since you’re always bringing money in. However, when you retire and your cash flow is constricted, the budget becomes crucially important. Don’t underestimate the importance of your budget.
Trying to Have a DIY Retirement Plan
At REAP Financial, we tend to meet families in their 50s and 60s, when they’re considering a transition to retirement. Some families are even forced into retirement by health conditions or other life circumstances. All of this to say, retirement is a different ball game, and there are lots of factors that go into it, as we’ve mentioned above. Tax and retirement planning can become more complex when most of your wealth is in IRAs or 401(k)s. One way to manage your tax bracket in retirement is through Roth conversions, but these conversions can create taxes and complications. For these reasons, it is essential you work with a qualified, fiduciary adviser who can guide you through the process.
Financial Planning for Retirement Success
Retirement planning is more complex than it seems, but with the right strategies and guidance, it can lead to long-term success. At REAP Financial, our fiduciary advisers specialize in creating personalized retirement plans for high-net-worth individuals and families. From budgeting and Social Security strategies to inflation planning and healthcare cost management, we help you navigate every aspect of retirement.
Located in Austin, Texas, we provide comprehensive financial guidance tailored to your goals. Schedule a complimentary consultation today and discover how we can help you retire with confidence and clarity.
Contact REAP Financial
Phone: (512) 249-7300
Our Main Office Address
REAP Financial
9414 Anderson Mill Rd #100
Austin, TX 78729
