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4 Reasons Your Retirement Plan Might Fall Short

May AOTM

Ever find yourself daydreaming about retirement? Whether your dream retirement entails traveling the world, dedicating time to beloved hobbies, or helping your children and grandchildren, saving enough for retirement is critical to enjoying all of these endeavors. Everyone deserves the best retirement possible, but numerous planning mistakes can cause retirement plans to fall short.

According to recent studies, retirement savings look grim for many Americans for reasons such as living longer, expensive medical care, and the rising cost of living. One survey showed that 45% of all Americans have saved nothing for their retirement, including 40% of Baby Boomers. This trend continues with younger generations too, with a recent report from The National Institute on Retirement Security showing that 66% of Millennials haven’t saved a penny towards their retirement.

May AOTM

(Credit: Time/GoBankingRates)

If you have started saving for retirement, you’re definitely ahead of the curve. However, you could still be engaging in some of the biggest retirement planning mistakes—without even realizing it. How can you save enough to thoroughly enjoy your ‘golden years,’ without hurting your finances in the meantime? Here are 4 retirement planning mistakes worth avoiding:

Mistake #1: Focusing on the Return Rate

If you have an investment that produces a high rate of return, it’s easy to get caught up in always pursuing that outcome. However, be wary of that type of bias, as it could negatively impact your future investments. Rather than chasing rates of returns, shift your focus to creating a diversified portfolio that spreads out investments through a variety of fund types. This might include balanced, index, equity, or global. Working with a financial advisor that helps you diversify your portfolio can help protect your retirement savings if/when the economy goes sideways. Plus, they’ll help you discover investments that match your retirement goals and risk tolerance.

Mistake #2: Retiring Too Early

Many of those saving for retirement aren’t saving as much as they need to continue their lifestyle during retirement. If that sounds like your situation, then possibly consider staying in the workforce a little longer and wait to take your Social Security benefits. This will allow you to save longer and also maximize your benefits if you don’t apply for them at age 62.

Additionally, Social Security data shows that around 33% of retirees live until 92 years old, and 75% of retirees apply for benefits as soon as they hit 62. With this in mind, pushing retirement back a bit could benefit you in the long-run.

With that said, pushing back retirement isn’t the best option for everyone. There are many reasons to retire as soon as you can, such as having health issues or other life circumstances that encourage early retirement. Whether you plan to retire early or need to retire later than expected, working with a financial advisor can help you determine the best way to prepare yourself for your specific retirement needs.

Mistake #3: Not Saving Consistently

One of the worst retirement mistakes to avoid is saving too little now and hoping you can ‘catch up’ in the future. The truth is, catching up rarely happens, and unexpected life circumstances can make catching up impossible in some cases.

According to the Center for Retirement Research at Boston College, the median retirement account balance for 55 to 64-year-olds was just over $110,000. If this money had to stretch over 20 to 25 years (which it likely will as people are living longer), it amounts to just over $400 per month to live on. We can see this is just not realistic in today’s world.

To save more, create a budget, cut out unnecessary spending, open a 401(k) through your employer or an individual retirement fund as a self-employed individual, and save extra money with each raise or bonus you receive from work. Working with a financial advisor is one way to shed light on other financial strategies to boost your retirement savings.

Mistake #4: Not Factoring Taxes into the Equation

 Another common mistake made during retirement is forgetting about taxes and their effect on your savings. Tax deductions change for many people once in their in retirement, and some retirees end up paying more in taxes. Consider speaking with a financial professional about tax-free withdrawals from Roth IRAs or about timing withdrawals from accounts that will be taxed.

Want to avoid other retirement saving mistakes and create a personalized retirement plan? Contact us today for a complimentary consultation.

Preparing Your Children for Adulthood through Financial Literacy

AOTM April GraphicAs a financial advisor, I learn a lot about clients’ short and long-term financial goals through many conversations and building relationships with them. I also often learn about their frustrations and regrets regarding past financial decisions. During these conversations about financial regrets, I often remind clients that it is important to remember that with time comes perspective and experience. So while they, as adults, may have regrets about past financial blunders, they can use their knowledge and experience to help their children steer clear of the same mistakes. With April being Financial Literacy Month, there is no better time to learn about the importance of teaching children about financial matters and helping them form good habits.

Are you hesitant to speak with your children about financial matters because of how you’ve handled past situations? Well, you aren’t alone. Many parents are reluctant to speak with their kids about finance but haven’t considered using their personal experiences as a lesson to teach their kids about financial consequences. While some parents think their child will learn financial literacy in school, only 17 states in America currently require students to take a personal finance course. If children aren’t learning about money from their parents and/or guardian, many children are left in the dark or could learn negative financial habits from their peers or media.

Broach the financial conversation with your children knowing you don’t have to be a financial genius in order to teach them helpful lessons for the future. Sometimes these conversations even help parents take better control of their own financial situation, in order to be a strong role model for their children.

Not sure which financial lessons are most important for your children to be aware of? Here are 4 to consider when you prepare to teach your son or daughter how to build a solid financial future:

  1. Earning Money. One of the first experiences your child will have when it comes to financial matters is earning money. Whether you are offering a small stipend for jobs around the home or your child has a part-time job after school, earning money through physical or mental effort helps your child associate value to labor.
  1. The Importance of Budgeting. The topic of budgeting can be brought up at a relatively early age. Whether your child earns an allowance or is paid from a job outside of the home, discuss how he or she can create a budget with the earnings. Some parents require the income a child earns to be used for their discretionary spending – things like gas, going out with friends, or buying a new clothing item. Be sure to help your child create a system where a portion of his or her money will go into savings, an emergency fund, their car or phone payment, etc.Budgeting helps children learn the value of money and gain a clearer picture of the time and effort involved in obtaining something of value or make a major purchase in the future.
  1. Saving Money. It seems like such a simple topic yet saving money is often not discussed with younger generations. As young men and women between the ages of 17 and 25 make plans to move away from the family home, many are unprepared for the shock of monthly bills and being tied to contractual obligations, such as rent, phone, and monthly car payment contracts.By having a firm grasp on saving money and budgeting ahead of time, your child can bypass “bill shock”, in addition to feelings of anxiety and confusion when he or she moves out of the home.You can teach younger children about the topic of saving money through the use of a piggy bank, and older children through opening a savings accounts and setting up various goals.
  1. The Difference of Needs vs. Wants. Because we live in a want-driven society, this is a crucial discussion to have with your child. We “need” food, shelter, clothing and security to survive – whereas our “want” is something we desire but do not depend on to live. Teach your child that “needs” should be built into their budget, whereas a splurge or extra money fund is what should be paying for the “wants” in life.

Of course, this can segue into a much broader discussion of why your child wants something – possibly because his or her friends have it, because they think it will make them more likeable, etc. There are many helpful conversations that can come from this topic that can benefit your children for years to come!

Take advantage of Financial Literacy Month this April and make a plan to start having regular discussions about money with your children. Teaching them while they’re young can help them build a strong and positive relationship with money, and instill in them the value of earning money, budgeting, saving, and setting up a secure future.

For more information on how to teach financial literacy to tweens, click here, and for teens, click here. Both links offer concepts and tasks that will help them develop the financial skills they need as they prepare for adulthood. If you would like more personalized financial guidance as you educate your kids about money, please contact us for a complimentary consultation.

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