5 Retirement Planning Do’s and Don’ts

Retirement Do’s and Don’ts

After decades of hard work, retirement should finally give you some time to stop and smell the roses. But note that by not working, your paychecks stop as well. That’s why retirement planning is so important. You want to have another source of income to at least partially replace your paychecks. Today, let’s take a look at the top retirement planning do’s and don’ts.

For the most part, the U.S. economy has been growing at a steady pace. But for retirees, have things gotten better?

A recent study showed that from 1998 to 2012, more retirees found their retirement “not at all satisfying.” Moreover, the share of respondents reporting “very satisfying” retirements dropped to below 50%. (Source: “Trends in Retirement Satisfaction in the United States: Fewer Having a Great Time,” Employee Benefit Research Institute, April 2016.)

High costs of health care could be a reason. Fidelity Investment estimated that the average single 65-year-old woman entering retirement in 2016 would need $135,000 to cover health care expenses in her retirement. For the average men, the amount is $125,000. (Source: “Health Care Costs for Couples in Retirement Rise to an Estimated $260,000, Fidelity Analysis Shows,” Fidelity Investments, August 16, 2016.)

So a couple entering retirement today would need to set aside $260,000 just for health care. And this number does not include long-term care, which Fidelity estimates an average 65-year-old couple would need an additional $130,000 to cover.

That’s why it is extremely important to have discipline in your retirement planning. If you follow these retirement planning do’s and don’ts, it is still possible to enjoy your golden years. Just take a look at the table below and you’ll see what I mean.

Do Start Early

Starting retirement planning early has many benefits. A survey showed that people who start saving for retirement in their 20s are 66% more likely to retire before age 60 compared to those that begin saving in their 30s. (Source: “Study: Saving before 30 greatly improves outlook for early retirement,” MoneyRates.com, February 6, 2015.)

The key to note here is the power of compounding. Albert Einstein once called compound interest “the eighth wonder of the world.”

The table below shows how much a person would have accumulated by age 65 by investing $10,000 a year into a portfolio that returns five percent annually. The only difference is the starting point. As you can see, if someone starts saving at 55 years old, they can expect to have $125,778.93 by age 65. But if they start investing $10,000 a year at age 25, that person would be able to accumulate $1,207,997.74 by age 65.

Just like people want to do different things in their retirement, they also have different levels of risk tolerance. Each person’s risk profile depends on their wealth, income, and how far they are from the expected retirement age. For instance, the type of stocks found in a 20-something’s portfolio might not be ideal for someone at age 55. Therefore, before deciding on what to put in your retirement portfolio, always make sure you know how much you can afford to lose.

Do Know Your Risk Tolerance

Just like people want to do different things in their retirement, they also have different levels of risk tolerance. Each person’s risk profile depends on their wealth, income, and how far they are from the expected retirement age. For instance, the type of stocks found in a 20-something’s portfolio might not be ideal for someone at age 55. Therefore, before deciding on what to put in your retirement portfolio, always make sure you know how much you can afford to lose.

And then there’s the willingness to tolerate risk. For example, a wealthy investor can afford to lose $10,000 in a startup company. However, if the idea of losing money concerns them, they might be better off not making the investment.

Do Aim for Fulfillment

Having a source of income to replace your paychecks (at least partially) is a necessary condition to enjoy your retirement, but it is by no means a sufficient one. Other than the financial means, you should also consider what you want to do in your retirement.

No one knows what’s best for you in your retirement than yourself. Some people would tell you it’s great to retire in a big city because they love the hectic city life. However, if you’d rather explore nature, you should just follow your own advice. Think about the things that you’ve always wanted to do, but never got a chance to. Plan them ahead and they should make your retirement very fulfilling.

Don’t Put All Your Eggs in One Basket

We have all heard of this line before, but it is still worth mentioning. Sometimes an investment opportunity can look so attractive that you don’t think there’s a chance of losing money, and you just want to put all your money into it. This is when you should remind yourself not to put all your eggs in one basket.

Putting all the eggs in one basket is one of the biggest retirement planning mistakes, and many people learned this the hard way. In Alberta, Canada, there was once a booming oil industry. Public oil companies offered something called “employee stock purchase plans.” Many employees participated in these plans and purchased stocks of the companies they were working for. Some even put all their retirement savings into those shares.

And then oil prices plunged. Oil companies in Alberta had massive layoffs. Their stocks also tumbled. Imagine being laid off and taking a huge loss in your retirement portfolio. Need I say more? Don’t put all your eggs in one basket.

Don’t Speculate

Speculating another big retirement planning mistake. Everyone loves triple-digit returns, and it’s always exciting to bet on “the next big thing.” But to get those returns, it almost always requires taking a substantial amount of risk. If “the next big thing” doesn’t come to fruition, the company’s stock price would take a huge hit. If you are building a portfolio that is expected to provide you with steady retirement income, would this company be a good fit? It’s wiser to invest, rather than to speculate.

Don’t File for Social Security Too Early

When to retire is a big decision for everyone. And for many people, making this decision can depend on when they want to start collecting Social Security payments.

You can collect early retirement benefits starting at age 62, but collecting those benefits too early might not be the best choice. By retiring early, you could face up to 30% in permanent reductions in your benefits, compared to what you would get if you waited until your full benefit age.

This works in the other direction as well. If you retire later than your Social Security retirement age, you can expect higher benefits.