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moneywatch.com / Retirement / Money for Life

5 Biggest Retirement Planning Mistakes

By | Oct 12, 2011

Boomers already faced significant retirement challenges before getting clobbered by the recent stock market volatility. The possibility of another recession and the political gridlock over the federal debt only add to the uncertainty. More than ever, you will need to make every dollar count when it comes to planning for retirement — once you are in your 50s or 60s, there isn’t much margin for error.

Here five common retirement planning mistakes and a few tips for avoiding them. Be forewared: There aren’t easy answers.  It will take time to navigate an effective course of action. The end result, however, will be peace of mind that you’re doing everything possible in a tough environment.

Given the market decline in the past three months, you might be tempted to make retirement planning mistake #1: running for shelter and moving all your stock investments into “safe” fixed investments. Even worse, you may decide to stop contributing to your 401(k), telling yourself “What’s the use if my accounts just plummet?” Those would both be bad moves. A recent study showed the highest average account balances were earned by investors who stayed the course during the 2008 - 2009 downturn — that is, investors who maintained their equity allocation and continued contributing to their 401(k)s. Another study showed that target date funds worked well at helping investors avoid making rash moves during the downturn.

Your best investing strategy right now? As advocated by fellow CBS MoneyWatch bloggers Allan Roth and Larry Swedroe, decide on an asset allocation between stocks and bonds that’s appropriate for you, ignore the scary headlines, and stick to your strategies during the tough times. Find some way to overcome your fear when the market goes down. After all, you’re not just investing for the next year or two — you’re investing for the next 20 to 30 years.

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  •  
    1

    bjarvis@...

    10/13/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    Two things we wish we had done differently: (1) Started saving for retirement earlier and (2) saved more $$ earlier.

  •  
    2

    DaveInRacine

    10/13/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    I agree with most of the points but not the delay in taking Social Security. Do a net present value (NPV) comparison in Excel and see what the value is of each of the payment streams. They come out nearly equal given that tomorrow's dollars are worth less than today's. And yes, factor in a guess at the inflation adjustments in the streams. The best result is taking SS at 62 and investing it. The second point I disagree with is adding an inflation raise annually. I plan on 4% or 5% without any adjustment. When the market is up I will have enough to set some aside for the down years. When the market is down I will adjust my life style and take some from what was set aside in the good years.

  •  
    3

    codinzoff

    10/13/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    How much is enough? What's the bottom line on retirement savings before it is safe to retire?

  •  
    4

    AnitaGen

    10/13/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    This all really only applies to those few folks who (1)earned
    enough to save a hefty amount from a relatively young age,
    meaning they could also afford the high costs of children and
    (2) have $1M+ invested (and not with B. Madoff or his ilk).

    I prefer to use the "Rich Dad" approach - create lasting
    streams of revenue over which you have far more control
    than the stock market. This means rental property and
    businesses that generate passive income, among other
    things.

    In addition, I've never really been clear on what one is
    supposed to do when one "retires". I chose I career that
    didn't pay much in the early years, but learned skills that
    enabled me to start a consulting practice in my 40's. If all
    else fails - I can continue to consult on a part-time basis far
    into my elder years - and maintain the value of write-offs for
    business expenses (e.g., home office, car, cell-phone,
    computer, etc.).

    At the same time, I can pursue other interesting business
    ideas and opportunities. I'd much rather invest in my own
    ideas and pans than in Wall Street - which clearly does not
    share my values.

    One of these days I'd really like to see an article on
    retirement that applies to the 99% of us who were not able
    to save huge amounts of money and/or who've been
    pummeled by the stock market and don't have a lot of time
    to make it up before we "retire". It seems that there is a
    HUGE disconnect goig on here.

  •  
    5

    halcyon1

    10/13/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    Isn't *everyone* guessing at how much savings they'll need for retirement? How can you accurately calculate your needs when you don't know how long you will live, and how much you'll need for medical care? Unless I'm missing something, it's all a guess.

  •  
    6

    Plecostomus

    10/13/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    @AnitaGen and others as well - I have virtually no (NO) retirement after a bunch of difficult financial challenges happening at the same time as the 2008 market-dive. So I am particularly grateful to have run across this social-security aspect (which I am about to mention) - I'm surprised, Mr. Vernon, that you didn't mention it. If you are or were married, once your current or former spouse turns 62, and you turn 62, you can draw on your spouse's SS until you are 70 (your amount will be approx 1/2 of spouse's amount) and stash it, save it, invest it whatever. Then at 70 switch to your own SS (if it is more than 1/2 of your spouse's). I may have some details in error here - but the principle holds, as it's saving my 66-year-old butt on a monthly basis.

    Also - Mr Vernon - as a reality check - Social Security's Cost of Living / inflation index is beyond worthless. Congress get a CPI in their paycheck in years when SS recipients don't (no increase for at least some recipients in 2009 & 2010 & 2011, which I know of from friends whose checks didn't budge more than about $.04. That's 4 cents.). The CPI for SS does not include true necessities, such as RENT, FOOD, HEATING GAS, ELECTRICITY, etc if I understand it correctly. It is based on what many of us consider non-essentials like new cars, maybe appliances, & TVs. For our indigent elderly this is beyond disastrous.

  •  
    7

    santosh.ranade@...

    10/13/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    Well. it is not all guess entirely. As the saying goes "failing to plan is planning to fail" so even if we do not know how long we are going to live , or what would medical costs you can go by statistics/family history.
    We will have new expenses ( because technology/globalization will change our life style.)
    Example: 1. We never purchased or dreamt of need to purchase water for daily consumption.
    2. Computer consumable

    Inflation has been beyond predictions and control and "Equity is hedge against inflation" is proven wrong. Still we need to be investing regularly and part of it into equity.

  •  
    8

    Helenstrong

    10/14/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    Wouldn't life be that much simpler if we knew how long the money had to last! The prospect of getting old is scary, given the rate of inflation growing by leaps and bounds on all the basics.

  •  
    9

    DaveInRacine

    10/14/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    I will add on to Santosh by saying that once you're within a few years of retirement you have a pretty good idea of what it costs to live. You know the cost of housing, food, utilities, and your health status and costs. You also have your spending patterns set. So add in the cost of hobbies or transportation to your volunteer activites and inflation and you have a start on retirement costs. Several years ago I was told that you need 3 things in order to retire - the house needs to be paid off (a place to live for only taxes and maintenance), the kids need to be through college and out of the house, and you need a source of medical coverage prior to Medicare.

  •  
    10

    Jstelzer

    10/14/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    For those who failed to save "enough" for retirement, I recommend you look into a cash flow investment strategy. One that I have found is the Snider Investment Method. I suggest you check out the Snider Advisors website and read more. Income in up and down markets

  •  
    11

    jandjward@...

    10/14/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    Another mistake:
    Believing Franklin Delano and becoming dependent on this Ponzi
    scheme. "I have put mine in, and now am dependent on others
    putting more in so I can take mine out."

    Another lie he told us is printed on my card: "Not to be used for
    purposes of identification."

  •  
    12

    Jstelzer

    10/14/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    I also disagree with DaveInRacine about social security. First, there is no possible way to make a blanket statement saying "Take it at 62 and invest". You say that the amounts are virtually the same when factoring in inflation to the future payments. This is completely incorrect because you also have to factor in inflation to the early payments. More than that, the impact taking your SS prior to full retirement age can seriously impact your spouses survivor benefits if you were to die. In fact, your spouse would only receive 50% of your benefit. If you were the higher wage earner, this would be a devastating blow.

    Also there are much more innovative social security strategies that I use with clients which would be wayyy more beneficial and tax efficient. You must meet with a competent financial advisor when deciding whether or not to start SS payments. It's a non revocable life decision that should be analyzed closely. There is certainly not a single "blanket solution" such as "take it at 62 and invest the difference".

    The key is this... If you're young, save more and save now. If you are approaching retirement and don't have significant assets saved, it is extremely important you that meet with a FEE ONLY financial advisor. They WILL help you to plan based on the facts in your situation. As a CFP candidate, I can tell you that too many people go to a non fee based advisor and simply get sold the highest commission product available.

  •  
    13

    Dick Dallas

    10/14/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    Adding to "Dave in Racine" -- his comments are, for my money, right on target. I am in that group who is "approaching retirement" (who knows how soon) and am doing all the reading/planning I possibly can.

    My wife and I have been very lucky to have 1) a paid off house; 2) child thru college; and 3) a source of medical coverage that makes this almost a non-issue for us. We are not, by any stretch of the imagination, vastly wealthy. What we have done is live within our salaries for many, many years -- keeping cars for 12 - 15 years, for instance.

    We also made some VERY luck investments many years ago -- and, here is the key -- held onto them through the ups and downs of the markets. At this time, I can see us retiring at some point in the next 3 to 5 years with little worry. We are working our a realistic budget for retirement -- NOT a bare bones/eat beans one! -- and really believe we will be able continue our current income stream.

    I also believe the ultimate value of articles/blogs such as Stever Vernon's is to be a "cattle prod" to get people to sit down and think about what the future (no matter how close or far) will bring. Kudos to him for this blog and his set of articles!

  •  
    14

    ThoseWhoServe

    10/14/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    I would suggest that retirees seriously consider taking Social Security as early as possible and delay taking payouts from other income sources, including IRAs, 401-k's, and personal savings as long as possible.

    Far too many Members of Congress are actively working to reduce or eliminate Social Security by a variety of means that include extending the eligible retirement age, imposing limits on payouts based on availability of other retirement income, increasing taxes.

    We already have Members of Congress who would like to end the Social Security program outright, or use the back door approach of converting Social Security to a welfare program subject to changes and funding through the annual Congressional budget process.

    Taking your Social Security early at least allows the recipient to get their retirement income, even reduced, before Congress starts reducing or taking your Social Security retirement income.

  •  
    15

    Don Johnson

    10/14/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    All food for thought...thanks to everyone.

  •  
    16

    Doofus2

    10/14/11 | Report as spam

    RE: 5 Biggest....

    @Dick Dallas...we, too, followed everything you did. No complaints except for the insurance part. I retired at 60, my wife at 55 (working full time that is). My employer had for decades allowed retirees to keep insurance at employee rates to 65. 19 months after retiring they cancelled the insurance, froze the pension and sent all the jobs to Juarez. So, we should give the owners lower taxes to create jobs (that they sent to Mexico).

  •  
    17

    davidjor@...

    10/15/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    Over weight! Yes indeed. So many other medical conditions
    stem from this. Just think, this is a health related topic and is
    related to financial well being.

    Thanks for the heads up on this!

  •  
    18

    jenyj89

    10/17/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    I find it difficult to swallow "waiting to draw SS" because too many times I've seen people work to 67-70, then die within a couple of years after retirement. It makes more sense IMHO to retire at 62 (if you can) and enjoy the rest of your life. Perhaps you might have to work part-time or supplement your income somehow, but that's alot better than being FULL-time!

    I want to retire and be able to enjoy my later years...not work until I'm too old to enjoy my retirement.

  •  
    19

    DaveInRacine

    10/17/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    To Jstelzer

    The NPV calculations do take into account inflation for all of the revenue streams being compared. They also account for all of the years of zero revenue. That is why they are a much more accurate representation of the value of the total dollars received over time. You can't add up the raw dollars received and compare them because they have different values over time. And that's what actuaries do so that the value of dollars received (or paid out if you are on the Social Security Administration side) are roughly equivalent. This is similar to pension or annuity calculations.

    And of course I agree that there are no blanket statements when commenting on financial matters, whether it's to take or wait, eveyone's situation may be different - need for income at 62, health status, projected lifespan, desire to keep working, etc. What I do encourage people to do is to create their own spreadsheets with the many individual assumptions. For my situation with my my set of variables, the "take at 62 and invest" provided the greatest NPV.

  •  
    20

    AngieRonald

    10/17/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    Plecostomus noted drawing upon a spouse's social security. While that sounds like a great thing, s/he left out one minor detail. Read this from www.findlaw.com:

    Social Security Benefits
    A divorced spouse may be eligible to collect Social Security retirement benefits based on the work record of his or her ex-spouse, as long as he or she:

    is sixty-two or older
    is unmarried
    was married to the worker for at least ten years and
    is not entitled to benefits on own or other account, which exceed one-half the wage earner?s primary benefit amount.

    For those of us who are 62 or older, married to the ex-spouse for at least ten years (and the rest of that statement) BUT have remarried, we get (drum roll...) nothing.

  •  
    21

    AnitaGen

    10/18/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    @AngieRonald - Yes, if remarried, you get nothing from the
    former spouse, because you now qualify for CURRENT spouse's
    SS spousal benefits. Why is that not fair?

    Under your argument, a person (likely female) who was
    married to several now ex-spouses, whether now married or
    not, would qualify for all other spousal benefits? And SS goes
    broke even faster?

  •  
    22

    AngieRonald

    10/18/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    AnitaGen, AnitaGen...you missed the point completely! Nowhere in my comments did I say or imply the law was unfair. I was simply adding the piece of information, a critical piece, that was left out of Plecostomus's comments. As noted, they would lead one so interested to believe any divorced spouse could collect from every ex-spouse's social security regardless of whether he or she remarried. And, where would this person need to be "likely female?" My spouse (male) made out like a bandit when we divorced. The "likely female" (me!) got taken to the cleaners. OK, I added that as a rant, and my personal comment can serve as only an example of why "likely" isn't always the case.

  •  
    23

    weizz

    10/18/11 | Reported as spam

    RE: 5 Biggest Retirement Planning Mistakes

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    24

    rishwoj

    10/19/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    I believe that you kind of get used to the money you have, so therefore when you retire you should aim to have what you currently spend. I suppose though as long as you have a roof over your head and can afford to eat then you will be ok. zumba shoes

  •  
    25

    weixx

    10/19/11 | Reported as spam

    RE: 5 Biggest Retirement Planning Mistakes

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  •  
    26

    Savethenet

    10/19/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    You know what the Biggest Retirement Mistake is? Thinking you will ever be able to afford it. If you are part of the 99%, you probably won't.

    However, that's one of the reasons we moved to an area where many people do to retire--so we can enjoy it.

    You can still have the perks of retirement, but the income of a working person.

  •  
    27

    Jay S Faulkner

    10/20/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    As everyone knows, the easy way for enough retirement income is to start early. Earlier the better. Using the 8th wonder of the world--compounding returns.

    The other item to consider is to have a rate of return more than inflation. If inflation is more than your rate of return, you are not moving forward to more retirement income, but less.

    The easiest path to more retirement income is an economic system that rewards you with a rebate in the form of "company stock" on everything you purchase for living, working, shopping, and playing...lilke MEMOism.

  •  
    28

    jroughgarden@...

    10/20/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    It seems to me that most of us who haven't amassed $1M+ in savings -- not including home equity -- don't plan a heck of a lot because it would not change our behavior. That is, we all have to work as long as we can, perhaps up to 70 full-time, and then consult or whatever part-time thereafter to supplement our incomes. When we do stop full-time work, we'll see what we have available as income steams given our expected longevity, and make due. A good option if money is really tight is to move to Central or South America as SS goes a long way down there.

  •  
    29

    cessna54

    10/21/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    I'm a millionaire, and, at age 54 have worked by *ss off. That's the problem I see here. People don't want to work hard. THAT is the secret. Millionaires also take risks that others don't want to. Too bad for those who worry about when they will start taking their SS payments. If you have that mindset, you are in big trouble. In life there are no free lunches. You have to WORK HARD!

  •  
    30

    cmcmcmzz

    10/22/11 | Report as spam

    RE: 5 Biggest Retirement Planning Mistakes

    http://www.luckyvogue.com

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Steve Vernon

Steve Vernon, FSA, uses his substantial actuarial experience to help working people make their money last for life. He has developed unbiased, trusted information and strategies for his recent book "Recession-Proof Your Retirement Years: Simple Retirement Planning Strategies That Work Through Thick or Thin" and his DVD/workbook "The Quest: For Long Life, Health and Prosperity." Steve is President of Rest-of-Life Communications and a research fellow and executive faculty member at the California Institute for Finance at California Lutheran University. For 35 years, he has helped large employers design and operate their retirement programs. He currently consults to Mercer's U.S. Retirement, Risk and Finance Business.

Steve Vernon