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Americans Make These 9 Common Mistakes in Retirement Planning—How to Avoid Them

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By Alessia Barranca

Frugal Feature

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Retirement is a time to down tools and strip away the stress of working life. To enjoy your retirement, you need to prepare for it by saving money and planning how you would like your golden years to be. We take a look at nine common mistakes people make when planning their retirement and tell you how you can avoid them:

Not Starting Early Enough

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It is easy to get caught up in the moment and not look ahead to the future. While this is a fun way to live your life, it can be problematic when you head towards retirement. Saving often and early is the best way to guarantee a financially secure future, as compound interest is the key to a comfortable retirement. You should start saving as soon as you enter the workplace from college and gradually increase the amount you save as your salary increases. Most employers have a retirement scheme that matches a certain percentage of your contributions, so you should use this if you have the opportunity. You can also look at getting on the property ladder as soon as possible and look to investment, depending on your risk factors.

Lack of a Clear Vision

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To best prepare for retirement, you must envision what it will look like. You may be someone who craves adventure and is looking forward to planning exciting vacations and weekend breaks. Or, you could be dreaming of moving to warmer climates and enjoying long, lazy days with excellent food and good drinks. Whatever you plan on doing when you retire, you should make sure your financial future meets those expectations. Whether you chat with friends or family or create a mood board to map out ideas for the future, laying down the foundations early on will give you the best chance of living out your dreams. You will need to research the cost of living where you want to live and roughly how much you will need to spend traveling.

Unrealistic Return Expectations

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It is easy to get excited about the potential returns on your investment, but try to avoid getting ahead of yourself and expecting too much. You need to be realistic about how much you earn from your investments, especially if you are taking high risks where you could lose some or all of your money. Instead, you should develop an investment strategy based on your risk tolerance and time horizon. This often means diversifying your portfolio across different asset classes, like bonds and stocks, to mitigate potential risk. If you decide how best to invest your money, consider seeking professional financial advice to create a personalized investment plan that aligns with your retirement goals.

Not Factoring in Inflation

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Inflation should always be in your mind when thinking of your financial future. A dollar today won’t buy the same things; it will be 20 or 30 years, so you need to factor this in when you are working out and how much you will be spending when you retire. You must account for inflation to have sufficient funds in your golden years, and you may not be able to reach the goals you have set for the future. Predicting what inflation will look like in years to come can be challenging, but you can keep an eye on economic forecasts or seek professional advice. Investing in assets that tend to outperform inflation, such as stocks with a history of dividend growth, is best.

Relying Solely on Social Security

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The purpose of Social Security benefits is to supplement your retirement income, not replace it. When you rely solely on Social Security checks, you can leave yourself with a significant shortfall, especially if you retire early or are used to a higher standard of living. You shouldn’t expect Social Security to cover all your retirement expenses, so explore additional income sources like private pensions, rental income, or part-time work in retirement. You can use an online calculator or speak to your local government department to understand how much social security you will be entitled to.

Not Having an Emergency Fund

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Unexpected medical bills or home repairs can derail your retirement plans, so you must be prepared. A readily accessible emergency fund provides a safety net and financial security during unforeseen circumstances. Not having a fund means you are unprepared for any eventualities, which can mean making sacrifices when it comes to the fun things you have planned. Using a high-yield savings account to build an emergency fund covering 3-6 months would be best.

Not Reviewing Your Plan Regularly

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Throughout your working life, things will change, and new retirement goals can emerge. Add to these unexpected life events that can alter your financial landscape, and you will understand the need to review your retirement plan regularly. You must periodically review and adjust your retirement plan to prepare for these changes. You should schedule regular reviews of your retirement plan on an annual basis, factoring in life changes like career transitions, inheritance, or changes in health care needs. If there are significant changes, you should recalculate your retirement needs and adjust your investment strategy as necessary.

Carrying Debt into Retirement

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Debt payments can significantly strain your retirement budget. Ideally, you want to enter retirement debt-free or with minimal manageable debt obligations. With the help of a financial advisor or a bank assistant, you should develop a plan to pay off high-interest debt before retiring. Prioritize eliminating credit card and loan debt and consider consolidating more enormous debts with lower interest rates.

Not Having a Withdrawal Strategy

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When planning your retirement finances, you should think about how you will withdraw any funding. Developing a sustainable withdrawal strategy ensures you keep your nest egg manageable and allows your money to last throughout your retirement. This is especially the case if you generally like to spend money rather than save, as you don’t want to be tempted to blow all of your money quickly. Work with a financial advisor to create a withdrawal strategy considering your tax implications, desired income stream, and life expectancy.