Retirement Planning Mistakes
Do You Make These Retirement Planning Mistakes?
Retirement planning is usually difficult for a variety of reasons. Some say its equivalent to rolling the dice because retirement may be decades away and you’re forced to make spending assumptions now.
What makes it worse is that if your guess is too far off, it can make a happy and comfortable retirement into one that is a nightmare.
Once you’re already in retirement, it can be very difficult to recover financially if some unforeseen large expense occurs. Some retirees try to find a job to supplement their income, but many others cannot. Either they’re not able physically, or the job market may be cold.
The following categories where un-planned spending generally occurs creates problems for some and blows their budget out the window.
- Helping your family – What do you do if your children or grandchildren get in a financial bind? What if they can’t pay for a needed medical expense? Saying no to them is next to impossible.
If you do say yes, you may have to cut your own expenses in order to help them. It’s a catch 22 at best. One of the common issues is having a grandchild ask you to guarantee his/her private student loan. It all seems so innocent and easy – after all no cash is needed to grant this favor.
But wait, the student graduates, can’t find a job in his degree field, can’t pay the loans and they go into default. You’re not advised by the grandchild because he’s embarrassed or forgets you guaranteed it. Now, you get a letter from the bank demanding full repayment, which can be in the tens of thousands of dollars. This is the retirement planning nightmare you never want to have. I wrote an article on this topic suggesting steps to take from day one. You can read it here.
- Large unplanned purchases – This is the one area of a budget for retirement planning that usually doesn’t get much attention, or not enough is set aside to cover any emergency. As an example, you may have set up a retirement budget item for traveling by auto to tour the entire country. Your car dies and isn’t worth repairing, and you must buy another one. This can blow a big hole in your budget.
Some retirees may have a large old home where they want to live. The possible emergency repairs that could pop up here are limitless. If you are in this type of retirement, be sure to set aside money to cover this. Some financial planners suggest setting aside 3% of the home’s value each year.
Don’t be in the situation of having to tap your 401(k) or some other tax-deferred account for a large amount of money to cover an unplanned large purchase. These withdrawals are taxable income and can hurt you by having a larger tax bill, not to mention depleting your retirement account early.
A lot of individuals today are struggling in retirement because they started retirement planning too late or didn’t plan properly. Some enter retirement with a large mortgage and/or credit card bills, and are forced to work, if they are able, well into their 70’s and 80’s.
- Entertainment – Generally, many retired individuals find it hard to believe that their entertainment expenses have risen so sharply. When you realize that working five or six days each week before retirement, there wasn’t much time or energy to play. After retirement, it’s just the opposite, so the expense will rise significantly.
Studies have disclosed that your entertainment expense declines with age. Once past the age of 85, it declined by 60% of those age 65. You may have the time and money, but the energy is almost gone for many.
- Health Care – This is one area where practically all retirees have the most difficulty planning for. Trying to guestimate what insurance premiums will be decades in the future is really rolling the dice. Currently, it’s estimated that it will cost $13,000.00 a year in medical expense for a married couple age 65 to 70.
It breaks down to $1,300.00 for prescription drugs, $8,000.00 for Medicare and supplemental insurance, and about $3,700.00 for out of pocket cost.
A shocking statistic reveals that over 30 million full-time employees are not covered by a retirement plan at work. There are very many others who are self-employed or who work part-time who are not covered either.
At the present time, eight states have mandated that certain employers must withhold a percentage of the employees pay to be deposited in Roth IRA’s. Some of those are already in place & others are being phased in. The employee can opt out if they so choose.
Often times, a financial planner is preparing a plan for a client and it looks rosy until medical costs are factored in – then it doesn’t work. The cost of drugs especially can be a disaster waiting to happen. Drug costs for cancer and other serious maladies can be enormous and sometimes unaffordable.
Even for those retirees who may be affluent, they are surprised to learn that Medicare premiums are higher for those whose adjusted gross income exceeds $170,000.00. Retirement planning for that is necessary as well.
- Long-term care costs – This without a doubt, can be one of the highest unplanned costs for a retiree, and is extremely difficult to plan for. Long-term care insurance policies premiums have skyrocketed due to a miscalculation by insurance companies on the actual cost of care.
Combination policies are now being issued and time will tell if that will be a solution or a band-aid to the high premium cost.
- How long you will live – Another problem for financial planners in estimating retirement costs, is estimating how long the retiree will live. The average 65-year-old is estimated to live until he is 84 and a half years old. This changes however, and makes retirement planning more difficult.
It doesn’t take a high IQ to figure out that you will spend more money the longer you live. Unfortunately, this is one that surprises a lot of people.
Instead of worrying about dying too young, we should be worried about living too long and outliving our retirement money. Retirement planning has never been so hard.
Gust Lenglet is the CEO of HBS Financial Group, Ltd., an accounting & tax preparation firm in Maryland. He has more than 25 years of experience in the banking and financial industry. Gust started his career as a loan officer at a major national bank, and then moved on to become controller of a large multi-state law firm. In recent years, he has written many financial articles that have been published on Ezine Articles and many websites.
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18 responses to “Retirement Planning Mistakes”
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Wow! After reading your article and all the different things that can ruin your retirement, it’s like waiting for the other shoe to drop. A couple of the issues can be eliminated, I guess, if one is able to say NO. The other issues you just hope for the best. Thanks for pointing these things out.
Thanks for your comment Tony. There are a lot of uncertainties when planning far into the future.
I can see why retirement planning can be so difficult. It’s almost like shooting craps when you consider so much that can go wrong.
Thanks Kate. I guess it’s not quite as bad as tossing the dice, but can appear like it. We have to plan for retirement even though some uncertainty might change it later on.
I never realized there were so many things that could go wrong to ruin retirement. I’m not sure what I would do if a close relative was in a real hard financial situation. It would be a gut-wrenching decision.
Yes, Stephanie, when we have to make a major decision like the one you alluded to, there is no answer that will fit every situation. We all have our own opinions as well as priorities. At the end of the day, we need to make a decision that we feel is the best and move on from there.
I like that ending paragraph that says don’t worry about dying too young, instead worry more about living too long and outliving your money. Good point.
Thanks Kellie. Yes, there are two ways of looking at it. We either die quicker and have enough retirement money or we outlive our money, and perhaps struggle a bit. As to which is worse is a matter of personal opinion. We appreciate you visiting our site and taking the time to comment. Thanks again.
A very enlightening article. I read somewhere where a financial planner said that if a family member was in need of money, one could borrow it. But as far as he knew, there were no loans for retirement money. I may have this backwards, but you get my drift. Every situation is different. so who really knows what to do until it happens.
Hi Nicole. You have that saying accurate. I personally believe the same thing and would do all that I could to help. If all retirement funds are spent instead, how in the world would we be able to help when we’re in retirement and have no money? But, as we said before, until we’re in that position, we can’t possible know what we would do.
Thanks for another article that points out several unknowns. I like your articles because you don’t always show a rosy picture. In life today, nothing is guaranteed, except one day we all leave it. All we can do is save all that we can for retirement and hope and pray that it will be enough and that we don’t have any major medical issues.
What concerns me the most is the cost of health care a decade or so down the road. It could be double or triple of the $13,000 figure in your article. If that’s the case, how in the world can the average retired person possibly handle that plus all of the other expenses? This gives me a very uneasy feeling, especially with the condition of social security and Medicare.
My parents told me about someone they knew that got burned real bad when they co-signed a student loan for one of their grand kids. It was a loan from a bank and it wasn’t being paid. They got a certified letter from the bank asking for full payment and the loan was for around 32,000.00. The bank finally let them pay the amount back monthly, but the payments really hurt them.
Thanks for your comment Scott. Yes, some of those co-signed student loans can be a nightmare waiting to haunt you. The co-signer often doesn’t know the loan is in default until that dreaded letter arrives. Some banks will notify the co-signer, but not all as they are not obligated to do so.
I can see why people want to meet with a financial planner to setup their retirement. With all of the medical expenses and other expenses that can go through the roof, it appears to me that it might be a guessing game at best. Then to top it off, you have to worry that you may live too long and run out of money.
Yes Michael, it can be very difficult sometimes to get through that maze. A good financial planner will take every possible consideration into account and will plan accordingly. True, a lot can happen, but if there is sufficient funds to cover a lot of the unknowns, it helps. Those retirees who started saving late in life, are usually the ones that may have a problem making ends meet.
First of all, I wanted to tell you that you have a real cool site. I’ve been reading your different articles for some time now, and find them very interesting. I graduated college a couple of years ago, and like most, have a lot of student loans to pay back. I have a good job, and the first thing my dad told me was to enroll in the company’s 401(k) plan and to put in all that I could. He also said not to touch it for anything. I read in your article where a lot of unfortunate things can happen and sure hope that they don’t happen to me. I have a long, long way until I retire and want to have enough saved so that I can travel and not have to worry about being able to afford it.
Thanks for your kind words Rebekah. Your dad gave you some very sound advice that you should follow. Retirement planning at a young age is very important and unfortunately, many don’t do it. I commend you for doing so and hope that you will continue to visit our site and comment.