5 Steps to Help You Avoid Retirement-Planning Pitfalls

Investing, Retirement Planning
5 Ways to Steer Around Retirement Planning Pitfalls

By Steven Elwell

Learn more about Steven on NerdWallet’s Ask an Advisor

As with most transitions, the key to smoothly moving into retirement is preparation. As you make the shift from accumulating wealth to spending down your savings, it can be hard to juggle the many moving pieces of your strategy. But pre-retirees must be careful to avoid common saving and investing pitfalls that can derail their plans. To help ensure a successful retirement, follow these five steps.

1. Know what you spend

Knowing how much money you will need each year to facilitate the lifestyle you want is essential to your financial independence in retirement. And it’s critical to figure this out before retiring, yet many fail to do so.

Without knowing what you need, how can you ever know if you have enough saved to retire? Making this mistake could mean running out of money or facing a dramatic decline in your standard of living early in retirement.

The solution is to track what you spend before retiring and adjust for any changes you expect to make in retirement, such as more frequent travel or paying off your mortgage.

2. Look up your life expectancy

According to the Social Security Administration, the average 65-year-old man will live to age 84, while the average 65-year-old woman will live to age 86. Medical advances continue to extend life expectancies, yet despite the statistics, too many pre-retirees believe they won’t live past age 75.

Living a long life is wonderful for many reasons, but it can mean outlasting your assets if you don’t plan properly. If a 65-year-old couple needs $50,000 per year in retirement and lives 10 years longer than they planned for, that’s an additional half a million dollars —and that doesn’t even account for inflation.

To make sure your retirement savings last as long as you do, it’s better to be conservative when estimating how long you’ll live — to err on the side of assuming you’ll live longer. This is why I often create financial plans for clients assuming they’ll live to age 95 or longer.

3. Plan for long-term care costs

The average yearly cost for a private room in a nursing home in New York in 2012 was $125,736 according to the Department of Health and Human Services. That cost is expected to rise to $197,328 by 2022. Just a few years in a nursing home could easily derail even the best-laid retirement plans. And HHS estimates that 70% of people turning age 65 will eventually need some form of long-term care.

There are ways to plan for this potential expense, including buying long-term care insurance or setting enough money aside to self-insure. One strategy that won’t work is relying on Medicare to cover the cost. The program pays for only a limited amount of care.

4. Reconsider your risk

I recently met a client who was in reasonably good shape to retire but had 25% of her savings in a single stock. That particular company had experienced a rough couple of years while the S&P 500 saw strong gains. Sadly, she had missed out on a great run in the stock market by not diversifying, and she took an unnecessary risk.

The stock market is a fickle animal and shouldn’t be underestimated. Things can move quickly in both directions, so it’s important to have an appropriate strategy as you enter retirement. As you transition from saving to spending, you have less room for error with investments. Pre-retirees should re-evaluate their investment strategy and consider the risks they are taking.

5. Anticipate inflation (hint: stay in stocks)

The crash of 2008 left many investors shellshocked. I’ve come across several people who are approaching retirement with almost all of their money in cash. They tell me that they’ve done the math and that their savings are more than adequate. But there’s one glaring problem: They haven’t accounted for the effects of inflation. Since many people will be in retirement for more than 20 years, inflation must be a consideration.

According to the U.S. Inflation Calculator, it would take nearly $70,000 today to replicate living expenses of $50,000 for someone who retired in 2000. While inflation may be just 1%-2% a year now, there is no way to predict what it might be in the future. The best way to protect yourself is to keep at least some portion of your portfolio invested in stocks, which have proven to be one of the best guards against inflation over long periods of time.

This article also appears on Nasdaq.

Image via iStock.


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