One of most gratifying parts of my job as a Certified Financial Planner is helping people of all ages get started on their retirement plan. Many people put off this task because they feel overwhelmed by what they perceive as a tidal wave of information, options, and decisions.
This anxiety is understandable. There are indeed endless paths to a great post-career life. But the good news is that every retirement strategy embraces the same simple truths.
Instead of talking about the dos, I want to talk about some basic don’ts of retirement planning.
Don’t Be an Ostrich
Those who plan for retirement fare much better than those who don’t. And when I say “much,” I mean exponentially.
I get why some folks ignore retirement planning. Hoping it will all work itself out is a lot easier than doing the heavy lifting of making a plan. But planning makes a substantial difference. Take the time to develop (and execute) a realistic savings strategy based on an honest inventory of where you are and where you want to be.
And don’t let regret that you didn’t start planning sooner prevent you from planning now. In other words, don’t let perfection be the enemy of the good.
Overcome your reticence to look your retirement financials in the face. Once you spring into action, planning will become more comfortable and you can start working towards your goals with confidence. Just take that first step.
The first step in planning a successful post-career life is determining how you plan to spend this wonderful new life stage. Next, use that vision to determine how much money you’ll need every month – and where it will come from.
You need to be steely-eyed and rational when addressing the money piece. Don’t let magical thinking lead you to under-estimate your expenses or sources of income. If you currently spend $300 on groceries, is that number really going to drop to $180 in retirement? On the other side of the coin, don’t let fear keep you in your cubicle when you’ve already amassed a nest egg large enough to support three good retirements.
Don’t Forget About Diversification
Keep an eye on what you hold in your retirement portfolio and consider reallocating when necessary. We want to avoid overexposure and risk as much as we can.
This is especially true for employees whose portfolios are top-heavy with investments in their employer’s stock. While you’re familiar with the business and you have an allegiance to it, don’t let these feelings drive your investment allocation. There’s too much potential for things to go poorly when you’re not diversified. If your company’s stock takes a big hit, you’ll go down with the ship.
Think about eggs in a basket. Keep them spread out. And try to minimize risk with allocations to a variety of industries, companies and asset classes.
There’s a health benefit to diversification. Negative wealth shock, defined as losing 75% of your net worth over two years or less, can dramatically erode your health and shorten your life expectancy. A well-diversified portfolio reduces the chance of negative wealth shock.
Don’t Ignore Taxes
I don’t know a single person that enjoys thinking about the tax implications associated with their various retirement investment vehicles and income streams. It’s not pleasant, but it must be done.
Some people just contribute to their 401(k)’s and call it a day. It’s easy to do because this money is pre-tax and grows tax-deferred, so Uncle Sam is out of sight, out of mind. When you start taking distributions from your account, however, you’ll have to face the taxman. It’s prudent to go ahead and start your planning now.
Say for example you have a 25% tax rate. This means your 401(k) account is only 75% as valuable as it looks! And we’re not even considering inflation here.
My advice is to keep taxes in mind during retirement planning. One strategy to reduce the tax sting is to put some of your take-home pay into tax-free retirement vehicles. It’s a double win – you get extra retirement cushion and this money has already been taxed. Plus, you’ll have both taxable and tax-free investments you can draw from once retirement rolls around, making that impending tax bill a bit easier to bear once the time comes.