Avoiding Common Mistakes That Can Cost You When You Retire
“If you fail to plan, you are planning to fail” – Benjamin Franklin
Planning your retirement is no easy task, however if you take the time to consider your goals, tax structures, social security legislation, investment options, risks and alternative strategies you will find yourself far better prepared.
Like a map showing the paths between destinations, a retirement plan will show you your best path to a comfortable retirement. A frequent downfall in planning is being too short-sighted. While we may be able to anticipate the next 5 or even 10 years, looking forwards 20 or 30 years is considerably more difficult to do.
Based on averages, men will live for about 18 years after retiring at age 65, while women will live for 22 more years. This gives a pretty solid interpretation as to how long your retirement savings will need to last and what lifestyle you can expect to live under this budget.
And finally it gives us an idea of what compromises we should make now, and on the way, in order to be more comfortable in our futures.
Everyone is prone to making mistakes and it should come as no surprise that retirement planning is no different. We can, however, learn from retirees before us and avoid repeating their mistakes for ourselves. Some common mistakes include:
Failing To Prepare A Budget For Pre & Post Retirement
Vital to the retirement planning process, budgeting provides you with a guide to simple savings that you can make before you retire, as well as giving you a clear indication of how much money you will need to accumulate to achieve your desired retirement income.
We recently reviewed the average, modest and comfortable retirement lifestyles in an article along with the respective incomes that they demand, available here. Otherwise you can also use our budget planner calculator to help.
Listening To The Wrong Advice
Although it usually comes from the right place, friends, family or a neighbour poking their head through the gate is unlikely to be appropriate for your particular financial situation. Everyone is in a different situation and any advice or ultimate decisions that you make with your finances should be made with consideration to, and be appropriately reflective of, your own personal situation.
Being Dependent Upon The Centrelink Age Pension
Many people move towards retirement with the intention of relying entirely on the Age Pension – oblivious to how much these government benefits actually provide them with. Accurate in September 2014, the maximum Age Pension that an individual can receive is $776.70 per fortnight, while couples may receive up to $585.50 each per fortnight.
These fortnightly payments decrease depending on your particular income and assets. In addition to this, it is not uncommon for the Age Pension to change from year to year, especially given the aging population and the burden the Australian Government faces to take care of retirees.
Retiring Too Early
Although a lot of people have their eyes set on retiring as soon as they can, working for an extra year or two can make an enormous difference to your retirement savings. While you may have a personal goal to retire buy a particular age, planning your retirement on this value alone can end up costing you significantly. Whether your superannuation withdrawals are made before or after 60 alone has a large impact upon the amount you will be taxed.
Additionally, there are several strategies to help boost the balance of your superannuation account if you continue to work through this period, such as the transition to retirement strategy. If you aren’t flexible with your retirement age at all, you may have to make other compromises in order for you to be able to fund the comfortable post-work lifestyle that you desire.
When you do retire and reach your superannuation preservation age, you will be able to access all of your superannuation savings. While this sudden increase in capital might have you eying off a new car, a big holiday or a fancy boat, you are much better off to avoid large, lump sum withdrawals. These withdrawals can rapidly deplete your retirement capital, leaving you without your savings and living a far less comfortable retirement than you had hoped.
Ignoring Economic Factors
The rate of return on your investments, tax rates and inflation rates are the three key economic factors that you need to consider when contemplating retirement. Although all of these factors are outside of our control, we can still appropriately plan for them and reduce any impact they may have upon our financial situation.
Poor Investment Decisions
A few common investment errors retirees (as well as other investors) tend to make are insufficient diversification, attempting to time the market, investing solely for tax benefits or chasing last year’s winners and historical returns.
It’s never too late to start planning your retirement, but the sooner you start to plan and the more you plan, the better off you will be. Though circumstance can always change, if you plan ahead and consider well into your future and your retirement, you can revise and adapt your retirement strategy over time, allowing you to stay on track and be as prepared as possible in reaching your retirement goals.
Know someone who will find this useful?
Share this with them!