David Lerner Associates: Review Common Retirement Planning Mistakes
When it comes to the retirement readiness of the average American, the news, unfortunately, isn’t very good — at least not if a new survey released by the Employee Benefit Research Institute (EBRI) is to be believed.
According to EBRI’s 2014 Retirement Confidence Survey, only 18 percent of Americans say they are “very confident” in their retirement financial security. And only a little over half (57 percent) say they are actively saving for retirement, with about one-third (35 percent) saying they haven’t saved any money yet for their future retirement.
“There are a number of different retirement planning mistakes that people make, but the biggest one, obviously, is not saving anything for retirement,” says David Lerner Associates Executive Vice President Daniel Lerner. “So if you are among the one-third of Americans who are not currently saving for retirement, the advice is simple: Get in the game.”
If you are setting aside some money in a retirement savings account like an IRA or 401(k), this is a good start. The next step is to avoid making some of the most common retirement planning mistakes, which often include the following:
1. Not maximizing retirement plan contributions. Retirement may seem like it’s so far away that there will be plenty of time later to save for it. And besides, there may be so many other pressing financial priorities right now that it’s hard to maximize your retirement plan contributions.
But according to Lerner, not making saving for retirement a top financial priority right now could cost a lot of money later. This is due to the long-term impact of compounding. “The more money you save for retirement, and the sooner you save it, the more opportunity you have to benefit from long-term compounding of your returns.”
2. Being too conservative with retirement account investments. Everyone has to determine their own level of risk tolerance and balance their own risk vs. reward equation. But many experts recommend assuming a little bit more risk with retirement investments, especially if you are relatively young and have decades ahead of you before your actual retirement date.
“This is because you may have a longer timeframe during which you can potentially make up for short-term losses incurred due to the potential volatility of riskier assets like stocks and stock mutual funds,” says Lerner. For example, if an individual invests $500 per month in a money market savings account earning .5 percent, this would grow to only $194,157 in 30 years. But $500 per month invested in riskier assets that earn an average annual return of 8 percent would grow to $745,179 in 30 years.
3. Not planning a retirement budget. It’s hard to know exactly how much money you will spend in retirement — and thus exactly how much you need to save during your working life. But it’s possible to make an educated guess, and then base your retirement saving goals on this.
As you plan your retirement budget, don’t forget to include healthcare expenses. “If you think that Medicare is going to cover all of your healthcare costs in retirement, think again,” says Lerner. Also, be sure to factor in the effects of inflation on your retirement budget. “A dollar probably won’t have the same purchasing power in 20 or 30 years that it has today,” says Lerner.
4. Dipping into retirement accounts early. This could be the biggest retirement planning mistake of all. Not only will there likely be penalties and interest due if you are under age 59½, but also you’ll be shrinking your future retirement nest egg.
Lerner acknowledges that in the aftermath of the Great Recession, many Americans have had to tap their retirement accounts to pay their monthly bills. “There may be situations where tapping into a retirement account is the only option for paying the mortgage or rent and buying groceries,” he says. “But unless you have no access to any other sources of cash to meet monthly living expenses, tapping into a retirement account early should be avoided if at all possible.”
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC