Planning for retirement can seem like trying to hit a moving target at times. Attempting to anticipate both your expenses and market conditions ten, twenty, or even thirty years out can seem like an impossible feat.
Even though it seems difficult to look into the future in such a detailed way, it’s still worth putting some effort into planning a comfortable retirement despite the uncertainties. As the saying goes, “Hope for the best but plan for the worst.”
While you should be much more optimistic than this, you should “hedge your bets,” so to speak, with several contingency plans and alternate options – should your best case scenario not pan out as expected.
As we saw with the 2008 market crash, financial circumstances can change drastically for retirees depending on their nest egg. While you wouldn’t expect to know every single future outcome, there are some retirement planning mistakes you can avoid to help you create a quality of life that is closest to what you envision for your later years.
Not Consulting a Professional
Planning for retirement is not a commonplace activity. You’re one person and if you’ve got a partner, they are another. Constructing a retirement plan for one or two people doesn’t constitute enough experience to warrant an expert-level badge.
Whereas, a retirement planning expert will have helped hundreds or thousands of people through this process. Though you may have to pay a fee or agree to a commissioned structure, it could be worth it to engage a financial professional to avoid pitfalls you could pay for many years down the road.
Not Accounting for Taxes
While you may be expecting your nest egg to grow handsomely and be available for your retirement income, you can’t count on pocketing all of it. Make sure you understand the implication of withdrawing your income in your retirement years.
Don’t forget — you may have several sources of income compounded by capital gains, dividends, Social Security benefits and other sources.
All this income will receive a certain level of taxation that will cut into your net income. Make sure you account for this so you’ll know the actual amount of income you’ll have to spend in retirement.
Underestimating Medical Expenses
In line with underestimating tax liability, is underestimating expenses in retirement. Perhaps one of the most overlooked expenses is healthcare and long-term care. It’s hard to imagine a future version of yourself that consumes much more in the way of medical care or any type of living assistance care.
Even if the worst case scenario doesn’t manifest when it comes to your health, it’s good to plan for additional expenses in this area just in case. At the very least, you’ll have additional wiggle room in your budget if you never end up needing to use the money you’ve budgeted for medical expenses.
Not Creating a Plan B
As we all saw in the great recession of 2008, declining conditions in the stock market that send ripples through the global economy can wreak havoc on even the most carefully planned investment portfolios.
Retirees at that time found out that having most of their wealth in the stock market made retirement much more difficult with their nest eggs reduced by half or more. For this reason, it’s good to have a contingency plan to move money around in case of another market downturn.
It might mean putting a few years of expenses in more liquid holdings or diversifying into other financial products like real estate or annuities. It could also mean taking on a second source of income in the form of a part-time job or consulting work. It also may mean exploring products like a reverse mortgage, a financial product that uses your home’s equity to provide you with extra money to use however you want.
Though there’s no crystal ball we can look through to determine our retirement future, it doesn’t mean that we shouldn’t plan for the unexpected. There are so many tools and financial products available to us in these modern times, that it shouldn’t be hard to find one or more viable solutions to help plan an ideal retirement.
With all financial decisions and advice, please consult a financial advisor.
Aja McClanahan is a freelance writer and owner of www.principlesofincrease.com.