We often fear that huge mistakes will sink our retirement plans, like unwittingly investing in a pyramid scheme or hiring a greedy adviser. Though these big errors will certainly hurt, often, it’s the little, seemingly good decisions that come back to bite us and ruin our plans.
Here are five of these little mistakes that can sink even the most well thought-out plans.
1. Not Knowing How Much You Need to Save
You might be saving every month for retirement, but you might also be doing so without any forethought. Though saving anything is certainly better than nothing at all, not knowing how much you need to save could ruin your plans. You could end up will less money than you need in your golden years.
You need to figure out how much your retirement will cost. Think about the four major factors: your non-discretionary spending, your discretionary spending, inflation, and your life expectancy. When you consider these four factors, you’ll be able to create a preliminary budget for your expected costs after you retire, and then you can start saving an adequate amount every month with an actual goal in mind.
2. Saving in the Wrong Order
Everyone has their schedules and plans for paying down debt and saving. Many decide to pay off their mortgage, car, or student loans before putting anything away for retirement. But saving in the wrong order can actually be detrimental to your future plans.
Paying off your debts first actually isn’t a good idea. The great thing about saving for retirement is that you can benefit from the compound interest—the money you save now can then make you more money in the future, so it’s best to start saving immediately rather than to wait until all your debts are cleared.
First, max out your 401K and then your health savings account (if you have one). Then, implement a periodic investment program and fund a 529 plan if required. Only after this is done should you start to pre-pay your mortgage and other debts.
3. Investing in Active Mutual Funds
It’s been ingrained in your mind that you must have your funds actively managed. But paying someone to study the markets and decide which stocks to buy and sell in a mutual fund isn’t the best way to invest. In fact, nine out of ten active funds usually underperform the benchmark!
Instead, buy index funds. These funds are managed by computer programs that automatically maintain the right weightings. These funds not only cost a lot less, but perform better, too, because they are not likely to underperform the market.
4. Not Thinking about Your Health
No one wants to think about the day when they’ll need help just to get out of bed or go to the bathroom. But it’s a reality that we must all consider. And it’s better to prepare for ailing health now than when it’s too late. Don’t make the mistake of ignoring your potential future health problems because they’re too hard to think about. The cost of long-term care could drain your savings. Make a plan for the time you might spend in assisted living, and consider long-term care insurance just in case.
5. Taking Social Security Too Soon
Many Americans make the mistake of claiming their Social Security benefits before their full retirement age. Unless you have no choice but to claim Social Security early on because you’re in financial distress, this is a mistake you’ll want to avoid. If you delay claiming, you’ll actually boost the amount of benefits that you’ll receive later on—by about 8% every year you delay. Social Security will be one of your most valuable retirement assets, so get the most out of it by taking it later rather than sooner.