5 Retirement Planning Pitfalls…and How to Avoid Them

5 Retirement Planning Pitfalls…and How to Avoid Them

Remember the classic Atari “Pitfall!”?  Gen-X’ers may agree this was one of the signature video games of the early ‘80s.  Much like the game, we can all feel like Pitfall Harry at times — making our way through a maze-like jungle, climbing, running and jumping our way through life’s obstacles. Except instead of navigating quicksand and avoiding crocodiles, we’re dodging piles of debt and collecting stock, mutual fund and ETF treasures that will serve our family well as we approach college and head into retirement. 

To keep rolling with the Pitfall analogies, a successful retirement plan can afford you freedom and financial independence later in your life. On the other hand, a set of dreams without a treasure map may leave you feeling like you’ve hit a dead end–like your Pitfall clock is winding down before you can collect all of the treasure!

We’re all constantly reminded of our retirement milestone and the importance of saving up for it. Planning for your retirement may seem overwhelming, but it can be aided by a mapping out of goals and avoidance of a few traps.

Here are five “pitfalls” which may be sinking your retirement…and how to get back on track: 

Common Retirement Pitfalls

1. Not having a detailed map of your income sources

Many working Americans have only one or two sources of steady income: namely, their full-time jobs. However, when you’re planning for retirement (and when you’re in retirement!), you will likely find you have a number of different income streams. Some of those income streams include retirement accounts, social security, pensions, any part-time jobs, home equity, and more. 

When thinking about retirement, it’s important to make sure you’re tracking these different income sources – and how much income these sources provide. This may seem like basic advice, but you’d be surprised by the number of people who don’t have this crucial information mapped out! Having this information at the ready will empower you to better understand your financial situation – and plan ahead. 

How to get back on track: Begin with a list of retirement income streams and take note of the amounts and frequency. This is also an excellent time to assemble a list of monthly expenses in retirement.  This exercise will help you determine your “income gap”.

2. Assuming stocks will return as much in the next ten years as they have in the past ten years…

This one is important.  Stock returns in the last 1 year…or even the last ten years are historically high due to decreasing tax rates, decreasing interest rates, low inflation, Federal Reserve accommodations and COVID-19 stimulus.  We also find ourselves with richly valued US Stocks, just off of all-time highs.

The reality is that one should be planning on a diversified portfolio to produce a 4% to 6% rate of return over the next decade, depending on your risk level.  Keep in mind – when you are “T-Minus 10 Years to Retirement” your portfolio should not and likely will not be in all stocks.  This may highlight the need to consider working with a financial planner to help make sure you’re set up for success (without worrying each night). 

How to get back on track: Set realistic expectations for your retirement portfolios (401k, 403b,. IRA) in the next decade, and plan from there. Working with a financial planner isn’t necessary, but a plan is. Should you choose an advisory relationship, the right advisor will make sure you’re investing in alignment with your goals – and keep you on track without day-to-day stress. 

3. Taking too much risk

Whether you’re planning for retirement, or you’re already there, this common mistake is pretty straightforward: many people will take too great a risk with their money. Taking too much risk can seem like a good idea when the stock market is on a tear, but when — not if — the stock market takes a breather and corrects, you expose yourself to more risk of loss then your future income plan can tolerate. It is critical to understand how much risk you should be taking, especially as you head into retirement. 

How to get back on track: Log on to your retirement accounts (401k, IRA, etc.) and ensure you do not have too much of your portfolio allocated to the same type of investments.  At age 50, all stock…or all cash is not going to bring you balance. Not sure where to start? Ask one of our advisors about our Morningstar Portfolio Analysis program.

4. Making the assumption that “My house is my retirement.”

We often work with families who are planning on selling the home they have been in for decades as part of their retirement transition.  We often hear assumptions that the equity in a home is expected to contribute to retirement funding. Here in the Greater Boston Area, the hard truth is that the exchange from the three-decade single family to the over-55 condo with a first-floor bedroom may be an even exchange. 

“Downsizing” just isn’t what it used to be.

Be realistic about the role that the equity in your home will actually play in your retirement income plan.  A house is really not considered part of your “Liquid Net Worth”. Your Liquid Net Worth is composed of assets you can easily turn into cash (savings accounts, bonds, stocks, mutual funds, ETF’s, IRA’s) minus your debts. Liquid Net Worth is the number we use when trying to measure our clients financial health and longevity.

How to get back on track:  Plan early in terms of the WHERE and HOW you will physically live. Two things you can do are to be realistic about property values and accelerate paydown of your mortgage to build equity.

5. Failing to spend time doing things that you love with the people you enjoy

OK – as someone who has spent the last couple of decades working with money…I’m here to say:  It’s not all about money!

Just because you are saving for retirement (or are officially retired) doesn’t mean you should miss out on doing fun stuff with family and friends! Some of our clients come to us with a budget so tight that there’s very little room for actual living.

Saving money is important and so is sticking to your goals – but any good retirement plan should allow you the freedom to enjoy your life. If you want to take that Disney trip with your extended family, there’s a way to plan for that.  If you want to fix up that patio for more grilling and hang-time, there’s a way to plan for that, too. 

How to get back on track: When you’re setting up “buckets” of money for your various goals, be sure to pepper in some flexibility. You want to build in a budget for those once-in-a-lifetime trips and fun family memories! Otherwise, what’s the point?

Don’t let these common pitfalls endanger your retirement goals. You can follow a financial map to avoid potential setbacks and get closer to winning the game! Feel like talking about your own personal video game adventure? Help is available as there are empathetic and experienced advisors in your area who have played this game before! 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Bonds are subject to market and interests rate risk if sold prior to majority. Bond values will decline as interests rates rise and bonds are subject to availability and change in price. Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield.

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