4 Critical Mistakes in Retirement Planning
This is a guest post by Mike from DoNotWait, a blog focused on retirement planning.
As a financial planner, I create retirement plans on a weekly basis. When I meet my clients, they all have ideas of what they want their retirement to look like and how they can make it happen. This can be a major problem since several of their preconceived notions are often wrong. This is also why many individuals think they don’t need to plan for retirement. But going over a retirement plan is very important.
Here are 4 common critical mistakes in retirement planning:
#1 I Don’t Need a Retirement Plan
Is it because you lack time or that you think your financial advisor will try to sell you products? Either or, many people think that a retirement plan is useless. Some find it too complicated, others just think that they don’t know where they will be in 10 years so why bother with a plan?
While your retirement plan will likely change over the course of your life, it is important to have a line of direction. Thinking that you will manage retirement once it is “the right time” won’t be enough.
Do you have a will? Do you have enough insurance if you die tomorrow? How much can you withdraw per month at retirement? When can you retire and not worry about your finances?
All those questions can be answered through a retirement plan. Not having a plan is like driving to Brazil without a map by thinking “I just have to go south”… good luck!
If you think you need $45K per year to live comfortably at retirement, it will be very important to know how much you need accumulated by age 60 or 65 to be able to receive this amount of income. The sooner you plan your retirement, the easier it will be to achieve your objectives.
#2 I Will Generate 8% Returns
Some folks will create their retirement plan but they will prefer to draw nice graphs. When you input an 8% return in your investment projection, it sure looks good to see the huge balloon of your net worth hitting a million dollars before retirement. However an 8% projection may not be realistic. As a reference, here’s what you should use as an investment projection based on how you are invested:
|Investor Profile||Fixed Income / Equity (%)||Expected Yield (%)|
|Secure||100-85 / 0-15||3.25%|
|Conservative||85-70 / 15-30||4.00%|
|Moderate||70-55 / 30-45||4.50%|
|Balanced||55-40 / 45-60||5.00%|
|Growth||40-25 / 60-75||5.50%|
|Equity||25-0 / 75-100||5.75%|
This may sound discouraging but you are better off planning your investment strategy with a 5% yield rather than hoping for a miraculous 8% and realizing that you will end-up short by $250,000 in your portfolio upon retirement.
#3 My Pension Plan (or the Government’s plan) Will Be Enough
For many years, individuals were able to count on generous pension plans sponsored by huge companies. They were called defined benefit pension plans (DBP). The beauty of them was that they assured a steady pension income until you die. All that assured by the company itself. DBP’s are becoming very rare with the exception of a Government job or by working for a Canadian bank.
Nowadays you are on your own. Most pension plans have become defined contribution pension plans (DCP). What is the difference between benefit and contribution? The level of responsibility from the employer ;-). In a defined contribution pension plan, all you know is how much you contribute and how much your employer adds to the pot. You manage the pension plan through a choice of mutual funds and you leave the company with your investment portfolio. Therefore, you are vulnerable to market fluctuations and there is no fairy godmother to add more money into the fund to compensate for the bad years.
So depending on how much you invest in your pension plan, it can be interesting to know what it will amount to upon retirement.
#4 I Will Be Debt Free at Retirement
If you are 30 and have a mortgage, you probably think that you will be mortgage free at 55 – 60. Since your mortgage is 25-30 years of amortization, this sounds like a logical assumption. However, chances are that you won’t live in this house for the next 30 years. And if you do, I bet you will drop a ten grand or more in renovations, for a pool, spa, new kitchen or garage. Therefore, chances are that you won’t be debt free at retirement.
I regularly meet clients who still have a mortgage in the neighborhood of $100,000 when they are about to retire. It is safer to think that you will still have monthly payment of $500 to $1000 to pay off your debts at retirement. Some will buy a boat, others will change their car every 3 years. It all leads to a monthly payment. If you manage to retire debt free, you will only feel more comfortable and you will be able to afford more trips per year or finally renovate your bathroom without a renovation loan ;-).
Are you thinking of anything else? What is your perception of retirement planning? What do you think about making a plan? Do you have one?
Looking for more retirement planning tips? This guest post is provided by Mike at DoNotWait! A retirement planning blog where you can find information about investing, saving, estate and retirement planning.