When it comes to retirement planning, there are many things that people do wrong and it is often not their fault. If you think that it is time for you to start thinking about your retirement, then there is a good chance you are right. As you start developing a retirement plan, there are some common mistakes that people make that you should learn now so that you can avoid making them later.
Here are the most common mistakes that you should avoid while planning for retirement.
Starting too late
The main issue when it comes to retirement planning is that people start too late in their life and it can be harder for them to amass enough money to sustain them for the rest of their lives. As you are preparing for retirement you will want to make sure you start saving money when you are young because you will be able to benefit from compound interest. You can start benefiting from compound interest on your investments at any point during your retirement planning, but it is much more effective when you start investing at a young age as this allows your investment to compound over a long period of time. If you start investing while you are in your 20’s you will eventually get to the point where you earn more on your investments every year than what you earn from your job. When you reach this point during your retirement planning you have reached a very important milestone and you will be well on your way to having a successful retirement.
Forgetting about inflation
Another common mistake that people make when they are planning for retirement is that they forget about the impact that inflation has on their savings. Due to inflation, the value of 1 million dollars today will not have the same purchasing power in 20 years. In 20 years the purchasing power of 1 million dollars would be somewhere around $600,000 to $750,000 which is substantially less than 1 million. Often times people will forget that inflation will decrease the value of their money over time and this can be a costly mistake if people forget to account for the effects of inflation on their retirement savings. If you have a retirement savings goal in mind you need to think about what the purchasing power of your nest egg will be when you retire. Also, you need to consider how inflation will decrease the purchasing power of your retirement savings during your retirement until the point you pass away.
Not investing properly
Another issue that people face when they are planning for retirement is that they do not choose the proper investments. Choosing the proper investments are a very important thing to do when it comes to planning your retirement. I strongly recommend talking to a financial advisor that is experienced in retirement planning while you are still young. If you do this, they will be able to explain different investments and you will start understanding how to plan your retirement. For example, when people are in their 20’s, they should be investing in stocks, equities, mutual funds, and ETFs that focuses on growth and maximizing returns. These investments generally carry more risk and they tend to be volatile and it is not uncommon to have your investment increase by 25% one year and then decrease by 25% the next. The thing that is important to remember is that these investments generally appreciate at a higher rate than other investments like bonds, GICS, and interest savings accounts. When you are young you have a lot of time to invest and this means that if you suffer a loss early on in your retirement planning it will not have drastic effects on the value of your account later on when it comes time to retire. When you are nearing retirement you will generally want to put some of your investments in lower-risk investments, some that are guaranteed like a savings account. With that being said, you will still need a part of your portfolio to be invested in assets that offer a higher return because you will still need growth to fund a 30-year retirement.
If you are thinking about starting your retirement plan soon, then I would suggest speaking to a financial advisor so they can help get you started on the right path. As you are planning for your retirement make sure you watch out for the common mistakes that people make so that you will be able to avoid them and have a successful retirement.