A financially secure and happy retirement doesn't just happen; it takes planning and some modifications as you get older. In this video, I will discuss some of the mistakes.
1. Not Having a Plan
2. Forgetting about Inflation
3. Not Creating any Tax-Free Income
4. Investing too Conservatively
5. Taking on too much Risk as You near Retirement.
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Full Transcript:
(00:00):
Five retirement planning mistakes to avoid. The first one might seem really basic, really obvious, and that is simply not having a plan. And as basic as this might sound, it's so important because this is the thing I find is what gives people the confidence to spend in retirement. So often I find the people that have been the best savers over the years are also the people that have the hardest time spending once they retire. But if you know what your expenses are and you know how you're going to meet those expenses and how you're going to handle any contingencies that could come up, that's the thing that can help give you that confidence to spend your hard earned money and enjoy yourself. Second thing is simply not taking inflation into account here. If we assume, let's just say 3% inflation, and we take the rule of 72, that means 72 divided by three in 24 years, you're going to need twice as much money to live on.
(00:57):
If we assume 4% inflation, that means in 18 years, you're going to need twice as much money to live on. Now, most retirees tend to scale back their living expenses over time just because things like vacations, different travel, different entertainment, things like that over the years, a lot of retirees tend to spend less on those things. However, healthcare expenses, for instance, is something that continues to rise over time and historically has risen at more than twice the rate of overall inflation. So you have to account for these different types of expenses and understand the role that inflation will play as a part of that. The next thing is, is not having any access to tax-free income in retirement, having access to, let's say a Roth IRA for instance, can help give you a lot of flexibility in creating a withdrawal strategy because if your only source of income in retirement outside of perhaps Social Security is you've got to withdraw money from a 401(k)or an IRA.
(02:02):
And when you do that, that money's going to be subject to tax. So you've got that. And also that money could cause your Social Security benefits to become taxable when they may not have been otherwise. It could cause you to perhaps have to pay more for Medicare because you've got to pay the Irma surcharges depending on where you fall their income wise. So it just gives you less flexibility if you don't have tax-free income available to you. The next thing is, next mistake is investing too conservatively. Sometimes I find people that once they retire, they're right about getting close. They think they have to go way more conservatively with their investments. But keep in mind that, again, like we were talking about inflation a little bit ago, that let's say you're 65 and you retire, you could very well live another 15 years, 20 years, maybe 30 years or more even in retirement.
(03:02):
So you have to make sure that money that you're not going to need for some time is keeping up with the cost of living because otherwise that could put you at a very real risk of running out of money. And the final thing here is taking on too much risk as you near retirement. And so I know this is kind of the opposite side of this. A moment ago we were talking about not wanting to get too conservative. You have to have your money keep up with the cost of living over time. On the other hand, sometimes people want to take on too much risk as they near retirement, but you have to be aware of what's called a retirement red zone. It's often referred to or also called a financial red zone. And that's that time period about five years before you retire up until about five to 10 years after you retire.
(03:53):
Because if you were to lose substantial sums of money at that period of time and you lose that money and then you're needing to withdraw that money to live on, that could put you at a very real risk also of running out of money. We call that sequence of returns risk. And so this is where it could be wise. One strategy might be to segment your money between short-term money, medium term money, and long-term. Maybe short-term is that money you're going to need within the next three to five years, and then the medium term maybe in five to 10 years, and then that longer term money in 10 years or more, that really needs to keep up with inflation to make sure that money's keeping up with purchasing power. So some things to think about. If you like the video, make sure you like it, make sure you subscribe and I'll see you in the next one. Take care.