Everyone makes mistakes. This includes individuals with considerable accumulated wealth, those with fewer resources, and even the most careful planners. Retirement planning is a complex process with pitfalls that can have long-term financial effects. Getting established with a financial advisor can help savers avoid missteps. Visual Capitalist published the most common errors near-retirees make according to 2,700 surveyed financial professionals. These are at the top of the list [1]:
Underestimating the Impact of Inflation
Visual Capitalist reported that 49% of the surveyed professionals identified underestimating the impact of inflation as a key contributor to flawed retirement planning. Retirement plans should assume a rate of at least 3% annually when determining contributions, diversify the portfolio with stocks and bonds, and identify tax-friendly ways to conserve capital. Inflation and the rising costs of necessities are beyond control. Individuals can only prepare by making smart decisions with their savings and investments.
Underestimating Life Expectancy
No one knows exactly how long their life will be or when it will end, but it’s important to make some assumptions in planning for retirement. The general rule of thumb is age 90, and with this comes an increasing potential for needing long-term care and the resources to pay for it. An individual’s health status, family history, and lifestyle should factor into the savings plan for whatever the future holds.
Overestimating Investment Income
Overconfidence bias can lead to overestimating investment income through poor decision-making, excessive trading, under-diversification, and taking unnecessary risks. Research from the Financial Industry Regulatory Authority (FINRA) has shown that ego-driven tendencies surrounding financial chops can cause investors to make portfolio-damaging decisions. [2] Investors can better realize their investment strength by seeking feedback from a wealth advisor, considering contradictory evidence, and sticking to a trading plan.
Forgetting Healthcare Costs
Most Americans underestimate the cost of healthcare in retirement because there are common misconceptions about coverage. Healthcare encompasses standard medical care, prescriptions, medical devices and equipment, and long-term care. To qualify for Medicaid, individuals must fall below the income threshold and have exhausted their savings. Medicare covers 100 days maximum of long-term care after a qualifying hospital stay and the national median cost of a private room in a nursing home was $116,800 according to a Genworth survey. [3] Healthcare can become the single greatest expense with age in retirement. Preparing for it is a must.
Failing to Understand Income Sources
According to a 2024 MassMutual survey, 40% of near-retirees believe that Social Security will be their biggest source of income, followed by a 401K or 403b, then pension and investments. The current full retirement age is 67, and 45% of the near-retirees who participated in the survey did not know this. Many did not have an estate plan in place and more than one-third believed their retirement income would not be able to sustain them for more than 10 years. [4] These statistics highlight that many people approaching retirement are not financially prepared for it, and do not understand where their income in retirement will come from.
Lacking a Healthy Cash Balance
Many retirees who financially rely on their assets do not always have enough liquid cash. Turning retirement savings into income isn’t just about selling investments. The goal is to maintain enough liquidity to cover both expected and unanticipated needs and expenses, but not have so much cash that interest-bearing opportunities are lost. Retirement timing, life expectancy, account types, and tax considerations impact the available cash flow at different points in the retirement journey. Proper cash flow planning allows retirees to be more prepared for various market conditions and instills confidence.
Consulting a wealth advisor can help investors avoid the costly mistakes many pre-retirees make. This one step toward smart planning for the future can make all the difference in living comfortably throughout retirement and beyond. Click HERE to contact us at SHP Financial for a complimentary review of your finances today.
Sources:
[1]https://www.visualcapitalist.com/charted-top-10-retirement-planning-mistakes/#google_vignette
[2] https://www.cnbc.com/2023/01/19/why-overconfidence-bias-may-cost-investors.html
