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3 Retirement planning mistakes you may not even realize you are doing



Retirement planning takes decades of hard work, and it can sometimes be confusing and overwhelming. Fifty-six percent of Americans have no idea how much to save for retirement, a survey from Northwestern Mutual found, and about 1 in 5 have no retirement savings whatsoever.

Even if you try to save for the future, you will probably make some mistakes along the way, and that's OK – as long as you correct them. Some mistakes are subtle enough that you may not even realize you're making them. However, they can throw the entire retirement plan off the track.

  The man who lets coins fall through his fingers.

Image Source: Getty Images.

1
. Underestimating Your Expenditure on Retirement

The calculation of how much you are likely to spend each year when you retire is the basis for pension preparation. If you underestimate how much you want to spend each year, you may not save enough before you retire and run out of money too soon.

Even small miscalculations can also cause major financial problems. Spending even a few thousand more than you had planned each year adds up to when you spend decades in retirement, and depending on how much you spend each year, it can mean surviving your savings for several years.

Of course, you cannot predict exactly how much you will need each year in retirement, and unexpected expenses – especially health care expenses – will inevitably emerge. But the more accurate your estimate, the better your chances of saving enough.

To find out how much you want to spend on retirement, it is a good idea to make a retirement budget and chart all expected expenses. Although you cannot predict all of your costs, you will get a relatively accurate estimate to ensure that you do not underestimate the basic cost of living.

2. Assuming that Social Security will cover most (or all) of your expenses

About half of recent pensioners say Social Security benefits are the most important source of income, according to a Nationwide survey. However, almost a quarter say they receive less benefits than expected.

The average Social Security check is only $ 1,471 a month, which is hardly enough for most Americans to survive – especially as you get older and health care expenses start to creep up. Social security benefits are only designed to replace around 40% of your retirement income, so if you expect them to cover most of your retirement expenses, you may be in for a rude awakening.

In addition, there is the possibility that benefits can be cut in the future. Because more money is flowing out of the program than coming in, the Social Security program faces a cash shortage and is expected to drain its financial reserves by 2035. Although that doesn't mean the program will fall completely apart (as long as workers continue to pay tax, there will always be at least some money to distribute in benefits), which means the benefits may be reduced in the future. Now, it assumes that Congress has not come up with a solution before 2035. But it is a good idea to have a backup plan so that you do not place your financial future in the hands of the government.

3. Not having a withdrawal strategy for your retirement savings

You can save for decades and work diligently to build a strong and healthy nest egg. But if you retire too soon when you leave, it can undo all your hard work.

There is no simple answer for how to plan your retirement savings plan. Some financial experts recommend following the 4% rule, which says you can withdraw 4% of your total savings during the first retirement year, and then adjust the withdrawals each year after that to account for inflation. It's a great way to keep your expenses in check, and make sure your savings have a good shot to last the rest of your life.

But the 4% rule is not perfect, and it assumes that you will spend the same amount (adjusted for inflation) every year in retirement – which is not always realistic. For example, you can spend more during your first retirement years when you travel and check other activities with a bucket list, reduce temporary retirement and eventually spend more as you age due to health problems. In that case, it may be a good idea to discuss your plan with a financial advisor to determine the type of withdrawal strategy that suits your specific needs.

Making mistakes while planning retirement is on par with the course. Correcting them early ensures that you are on track to enjoy a financially secure retirement.


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