Saving for retirement is among the most important investment objectives, regardless of your age or stage in life. But simply resolving to put money away for the future may not be enough to ensure the comfort and security you ultimately desire. Responsible, educated investment decisions are key.
The following mistakes are often made by investors attempting to plan for retirement. Understanding how to avoid these mistakes can help you achieve the retirement of your dreams.
Many people assume that simply preserving investment principal and living off the interest is a viable retirement strategy. One of the many downfalls of this approach is that it fails to account for the effects of inflation. At a modest 4% rate, inflation can literally cut your spending power in half over a period of less than 20 years. That's why, in addition to income, your retirement investments must also provide enough capital growth to keep pace with inflation.
Timing is crucial when it comes to retirement planning. Your investment selection and asset allocation must accommodate your age and proximity to retirement. While an overly aggressive approach could expose you to unnecessary risk too close to the time you plan to withdraw your funds, investing too conservatively could result in failing to meet income objectives further down the road.
Squandering Tax Benefits
Some individuals don't fully utilize tax-deferred savings when planning for retirement. But it's important to remember that tax-deferral essentially enables you to reinvest earnings that would have otherwise been paid immediately to the IRS. This perk alone makes tax-deferred alternatives, such as 401(k)s, IRAs and annuities, powerful tools for growing your retirement assets.
Making Poor Assumptions
Forming accurate projections about the future is just as important as choosing the right investment strategy. In planning for retirement, people too often underestimate future living costs or overestimate future investment returns based on past trends. Seeking professional guidance to help you establish reasonable, conservative projections for the future can help prevent the possibility of outliving your savings.
Neglecting Insurance Coverage
Unexpected or prolonged health issues late in life can lead to enormous expenses. Without the proper insurance, these costs can rapidly erode funds you had set aside for leisure or even for your heirs. That's where long-term care insurance proves invaluable. Making sure you and your spouse are adequately covered is one of the most sensible steps you can take toward ensuring retirement security.
Avoiding common mistakes can go a long way toward helping you reach your retirement dreams.