Besides health, money is the obvious factor that will decide whether you spend your 60’s and 70’s travelling, enjoying your hobbies and having fun with your grandkids – or working underpaid jobs just to pay your rent, food and healthcare. Avoid the common retirement planning mistakes to make sure you end up in the first group.
1. Starting Too Late
When you are in your 20’s or 30’s, retirement seems to be too far away to worry about. The idea of sacrificing part of your hard earned money for something that happens 30 or 40 years from now is not very appealing. Moreover, there are other and more urgent things to spend money on, like paying off your student debt, buying a house or saving money for your children’s education.
If you are waiting for the moment when you don’t have anything else to spend money on and you can finally start saving for retirement, don’t. That moment will never come. The best time to start saving is now, unless you have already started.
2. Saving Too Little
The second retirement planning mistake is closely linked to the first one. Some people save very small amounts, such as £100 per month. While better than nothing, it is far from enough. £100 per month is £1,200 per year or £36,000 in 30 years. How long will you survive on £36,000? Yes, your savings will appreciate over time, but part of that will be neutralized by rising prices.
Regardless of your income, you should always aim at saving at least 10%, ideally closer to 15% or 20%. The exact figure depends on your particular objectives and circumstances. Of course, the later you start, the more you need to save every month.
3. Not Paying Off Your Debt First
There is one exception when saving for retirement should not be your first priority. If you have debt with high interest, such as credit cards or consumer loans, you should get rid of that first. If you pay 19.9% interest on your debt and choose to invest instead of repaying that debt, you will need your investments to return at least 19.9% (after taxes) to justify that decision. Of course, it is best to never get into this kind of “bad” debt in the first place. Living below your means is the key to saving.
On the other hand, if you have debt with low interest, such as a mortgage, investing can make more sense than early repayment. If you are not confident with the mathematics and considerations involved in making such decision, consult your financial consultant.
4. Mismanagement of Risk, Costs and Taxes
Some people invest too conservatively and put all their money into savings accounts or bonds, which will hardly beat inflation at the current record low interest rates. On the contrary, some take too much risk and often “put all their eggs in one basket”. Generally, you shouldn’t be afraid of riskier investments such as stocks, but you should diversify across funds, industries and countries and gradually reduce risk (move parts of your portfolio to bonds and safer investments) as you are approaching retirement.
Constructing an efficient retirement portfolio is a complex task and many factors must be taken into consideration, such as the current economic and financial climate, your risk attitude, time horizon, objectives, costs and taxes. Furthermore, your portfolio needs to be regularly reviewed as all these factors change over time.
5. Not Having a Plan
You will be less likely to make the above listed mistakes and more likely to achieve your goals if you have a plan and take systematic action. You should know how much time you have, the approximate amount you will need in the end and how to get there. While factors like your income, inflation or return on your investments are impossible to accurately predict, active planning and periodic reviews will ensure you stay on track. A skilled retirement planning adviser will help you better understand your options and structure your retirement portfolio in the most cost- and tax-efficient way.