Many of us aren’t addressing the realities of retirement planning. This week, we are going to look at some of those items and how to make sure you incorporate them into your planning.
The first reality is underestimating your life expectancy.
Twenty-five years ago, insurance companies estimated life expectancy at 83 years. Despite the volumes of media coverage generated over recent years about our increasing life spans, many investors still underestimate – often severely – just how long they could live. This wreaks havoc on retirement planning and finances. Recently a 90-year-old woman told me her friends were planning a party for her with 150 guests once she reaches 100.
Many financial planners now develop retirement plans based on life expectancy of 90 to 95 years. While people get it intellectually, the implications of longevity haven’t been an integral part of their thinking.
A common mistake when preparing for retirement is failing to consider a long-term care need.
The question you must ask yourself is, “Could your nest egg cover the potential cost of long-term care?” Premature long-term care can be steep and difficult to cover. However, the notion of spending a few thousand dollars a year for long-term care insurance, versus the possibility of hundreds of thousands of dollars in the future, can be smart money management.
Unfortunately, long term care insurance is not something that everyone can afford. Planning for longevity and funding your potential long-term care expenses should be a part of your retirement planning.
Another common mistake is making large loans to family members.
Let’s say you’re retired or on track for a comfortable retirement and a family member asks you for a large loan for a house, college, or to start a business. Many times, you’re not in a position to be as generous as you would like. This is like what we mentioned earlier about people failing to address their life expectancy and not preparing for potential long term care costs. Making big withdrawals from your nest egg, especially early in your retirement, can seriously crimp your spending in later years.
Underestimating expenses in retirement is something many people struggle with when approaching retirement.
Don’t think you’ll be spending a lot less money when you retire – forget all the old rules. Today, many retirees are healthy, they travel more, and they’re fixing up their houses. Maybe their spending slows in later years, but not at first. If you don’t have a handle on current cash flow and expenses, you can’t get started on retirement planning. Our best advice is to study your spending to see if your nest egg can support that level for several years into retirement. Test drive your retirement budget for at least a year before you retire. You’ll feel much more secure if you do!
The final piece of advice we have for those nearing retirement is to focus on your nest egg to the exclusion of all else.
The lesson here is while the need to grow your nest egg is critical, you cannot focus only on the finances and neglect the most important part of later life. Some invest money consistently along the way, but don’t prepare for a smooth and fulfilling transition into retirement. The big question is how are you going to spend your time and fill your days? Many don’t spend enough time contemplating what you’re going to – only what you’re going from.
If any of these realities and mistakes resonates with you and want to discuss them, give us a call!
This information is not intended to be a substitute for individualized advice and we suggest you reach out to a qualified financial advisor about your specific situation.