Today’s financial climate is making retirement planning more crucial than ever. As talk of inflation, rising interest rates, and a possible recession hit the news, would-be retirees or retirement planners of all ages may feel anxious about their future.
Many economists have acknowledged that the probability of a recession happening in the United States in 2024 is 54.9 percent, according to Statista. Hence, based on current events and predictions, it is natural for those saving up for retirement to want to review their retirement planning strategies.
In the U.S. the average American has USD 65,000 in retirement savings and by retirement age that grows to $255,200. This retirement figure means that most retirees have depleted savings accounts at a time when they have potentially several decades to live and not enough to cover emergency medical costs. Thus, it is imperative to create a solid recession-proof retirement plan. Evaluating which current financial habits are not serving you well and could hurt your retirement savings is essential as well.
A good retirement strategy should account for inflation, longevity, volatility, taxation, and legacy plans. Furthermore, it must eliminate risk amplifiers and practices that destroy future wealth and security.
What is Retirement Planning?
Retirement planning is setting income goals for retirement and determining the necessary processes and actions to achieve those goals. Awareness of your retirement needs is an introductory lesson in personal finance that you must pay attention to.
Moreover, personal finance know-how is essential to a successful retirement. It is not just about saving money. It encompasses identifying sources of income, assessing expenses and cost of living, developing a savings plan, and actively managing risk. Determining your current and future cash flow will enable you to compute your retirement savings goal.
Another way to see retirement planning is to view it simply as preparing for your future after your regular job or career. It means that you are saving for a time when your paid work life ends. It is wise to take a holistic approach, considering your potential future lifestyle, place of residence, and desired comfort level.
How much should you save for your nest egg?
How much in savings do you need to retire? The answer varies according to whom you ask. The short answer to this question is to save as much as possible.
However, there are some rules of thumb that you can use to guide you in computing a concrete figure. For example, some professionals use an 80 percent rule versus your current income. Thus, you have to multiply your current income within a given period by 0.8, which is how much you need to save to have a decent retirement sum within the same period.
If you want to go more in-depth, research other formulas that enable you to reach specific retirement calculations. Some examples include:
The 25x Rule
Take your current monthly budget, multiply it by 12 to get a rough annual budget, and then multiply your yearly budget by 25. This number gives you a 25-year estimate and will help create a starting point for the four percent rule.
The Four Percent Rule
The four percent rule estimates how you can withdraw for some lifestyle choices. Yes, you can afford to splurge during retirement, provided you stay within the growth of your investment portfolio.
A stock portfolio typically grows at six to seven percent per year. Thus, subtracting the cost of rising prices (approximately three percent), you are left with four percent
The bottom line is that you need a benchmark or goal to start with; otherwise, there is no direction to your savings plan.
Wrong Money Habits That Can Hurt Your Retirement Savings
As mentioned previously, more is needed to save and invest for retirement. It is also crucial to learn which habits can hurt your retirement savings. You will need better financial habits to reach your retirement goals even if you earn a lot.
Moreover, if you lack financial literacy and cannot identify such detrimental habits, you can waste all your effort in earning money and end up with an insufficient sum. It is best to educate yourself now and save time and effort.
1. Failing to Make a Sound Retirement Plan
The most apparent factor determining whether your retirement savings are sufficient is the failure to build a sound, comprehensive, and executable retirement financial plan based on your realistic capacity and limitations.
When creating a sound retirement plan, you need to bear in mind the power of compound interest. This idea can help you harness the power of money and time and save you a lot of effort as you age. Conversely, understanding compound interest will help your retirement savings.
Moreover, the lack of awareness of Retirement Living Standards (RLS) contributes to the failure of your retirement plan. When you make a plan, you need to consider your desired lifestyle. You can classify your lifestyle choice into one of these categories: Minimum, which structures around your basic needs; Moderate, which provides flexibility in your options and greater security; Comfortable, which gives you even more freedom and allows you to indulge in some luxuries.
2. Saving Too Late for Retirement
We do not have unlimited years to earn the same ideal income that we do during our career peak. Our peak working capacity is finite, and so is our peak income. If you understand compound interest, you will also understand why time is essential to retirement planning. Save within the right amount of time to ensure your retirement funds.
It will help if you view your retirement plan on a decade-by-decade basis. Millennials and Gen Z can benefit from early retirement advice. Learning early about healthy strategies that build your financial future and financial health can impact your retirement savings greatly.
In your twenties, for example, you can start by focusing on compound growth. You should save around 10 percent of your gross salary at a younger age. If you want to push yourself and improve your compound interest, you can bump it up to 15 percent. This decade of your life is for focusing on Roth options.
What is a Roth IRA? It is an individual retirement account to save or prepare for retirement. One of the primary benefits of a Roth IRA is the contributions to your account, plus the earnings on your contributions can grow tax-free. Furthermore, you can withdraw those earnings tax-free. The account is a tax-advantaged IRA wherein you contribute your after-tax income, hence the benefit.
In your thirties, you should save about 15 to 20 percent of your gross salary. Your thirties is when you should get serious about saving for retirement because you don’t have as much leeway as you did in the decade before. Remember that you should not touch whatever you have already saved for retirement.
In your forties, it’s time to think about seriously monitoring your lifestyle spending. Moreover, in this decade, you should be upping the ante and saving four times your salary. You should avoid sudden withdrawals from your retirement account to maximize your savings.
The earlier you prepare for retirement, the better your prospects will be. But don’t worry, if you did not start planning for retirement in your younger years, the next best time to start is today.
3. Inability to Pay Off High-Interest Credit Card Debt
Our modern social media-driven lifestyles often push us to buy things we don’t need. Our shopping habits are driven by what we see on the internet. The prevalence of easy online shopping, plus the ubiquity of credit card access, can cause many into high credit card debt, which is unhealthy for your retirement savings.
Credit card debt can balloon quickly, outrunning your income and wreaking havoc on your finances. Among the consequences of being unable to pay your credit card debt include accumulating late finance charges, an increase in your annual percentage rate or a penalty APR after being 60 days past due, and a long-term penalty APR, wherein you pay a higher rate even if you’ve already paid your bill. Moreover, not paying off your credit card debt can hurt your credit score and cause you to face collection agencies or lawsuits.
Such difficult circumstances due to your inability to settle your credit card debt can prevent you from prioritizing your retirement fund.
4. Too Much Reliance on Social Security
Some have the impression that social security can cover all their retirement needs. Social security benefits replace only a portion of your pre-retirement income. Social security only covers about 40 percent of an average wage earner’s ideal retirement fund.
Thus, to cover the rest of your retirement savings needs, study instruments like mutual funds and see if they are appropriate for your financial plan.
5. Failure to Diversify
Without a doubt, diversification is the pillar of investment strategies. You need to explore the various financial products and investments one can invest in for one’s retirement fund, including stocks, bonds, mutual funds, and annuities.
What is diversification? Diversification is the act of avoiding putting all your eggs in one basket, or the process of preventing risk overconcentration. It is the selection and allocation of one’s investment assets to reduce exposure to concentrated sources of risk.
Those who fail to diversify can fall prey to volatility, sudden market shifts, industry changes, geopolitical factors, or even the obsolescence of entire businesses or sectors. When diversifying, you need to consider various forms of risk, including market, geographical, idiosyncratic, and interest rate risks.
6. Investing too Conservatively
While proper retirement savings involves risk avoidance, it does not equate to a too-conservative strategy that limits your income potential. Retirement savers who are too reliant on commonplace instruments with little interest or risk should be more mindful of other opportunities that help them maximize their upside.
Investing with a conservative outlook may look safe but hides much risk. A portfolio that is on the conservative side and is full of bonds and money market fund investments could be too conservative to support retirement fully. Thus, if you have a more conservative portfolio, consider padding it with more aggressive investments, such as stocks, to achieve higher returns. Remember that riskier instruments are best for younger retirement planners. Moreover, it is crucial to consult a financial professional to help advise you and execute your decision.
7. Investing too aggressively – taking on too much risk as you approach retirement
As you get closer to retirement age, dial down the risk profile of your investments. It is all about timing. The younger you are, the more financial risk you can afford. The older you are, the less risk you can afford, especially if you are close to retirement.
Financial advisors generally recommend that investors gradually decrease their stock exposure as they approach retirement age to minimize risk.
8. Not Having an Emergency Fund for Retirement
An emergency fund is money you save for unexpected, serious, or dangerous situations requiring swift action. Some retirees need to factor in such an emergency fund when saving. Using your retirement fund as an emergency fund is a bad idea. An emergency fund can also be a backup for a sudden income loss.
According to Bankrate, only 43 percent of American adults can pay for an emergency based on their savings.
Increase your emergency fund as you get closer to your retirement. Some advisors recommend about 12 to 18 months of estimated costs or expenses for a decent emergency account.
Options for saving an emergency fund include a money market account with checking or a no-penalty CD.
9. Not Factoring in Healthcare Costs
Healthcare costs can take up a large chunk of your finances the older you get, especially towards and during retirement. Thus, it is imperative to factor in healthcare expenses as you save for retirement.
A study by Fidelity Investments states that in 2022, the average retiring couple could spend about $315,000 in healthcare and medical costs—five percent higher than in 2021. Obtaining enough health insurance will help you worry less about future healthcare costs.
10. Living Beyond Your Means
Overspending is a significant contributor to insufficient retirement funds. Today, many people are attracted to flamboyant lifestyles and impulsive spending habits. Keeping a lid on your spending habits will help you in the future. Tracking your monthly expenses goes a long way toward controlling your budget.
There is concrete evidence of bad spending habits. A 2023 Bankrate report states 49 percent of U.S. adults have less to no savings compared to 2022.
Overspending depletes your retirement account by taking away compounding potential. The best way to control overspending is to track your expenses and assess your priorities. Numerous apps can help you track your costs, so using such technologies to control spending can be wise.
Fix Your Financial Habits Now To Retire Comfortably
Awareness helps you correct your financial habits that can hurt your retirement savings. To improve your chances of building a comfortable nest egg, eliminate undesirable financial habits as soon as possible. The sooner you correct wrong financial behaviors, the sooner you reach an optimal retirement portfolio. Your increased savings will enable you to invest better, select a more diversified portfolio, take on more risk that results in more upside, and create a sufficient emergency fund that can cover unexpected events in your retired life.
Fixing your financial habits takes willpower and priority-setting. Remember to do it in a way that optimizes the benefits. Taking shortcuts or financial cheating hurts your retirement plan. The good news is that numerous tools can help you track expenses. Moreover, various investment instruments exist to help you put your money where it can make the most returns instead of spending it on unnecessary luxuries.
Changing your mindset from only thinking about the present to creating space to save and thrive in the future is the best thing you can do to retire comfortably. Remember to consult a financial advisor for the right financial advice once you get on track with your plan.
