Preparing for retirement can be tricky. But it doesn’t have to be that way. In fact, there are common pitfalls you’re likely to encounter during your retirement that may be avoidable with a bit of retirement planning and preparation. By acquainting yourself with these retirement traps now, and adjusting accordingly, you can be better positioned for all that is to come.
Counter the psychological impact of leaving work
At first glance, the prospect of relaxing alone at home every day might seem appealing. But after decades in the workforce, you may find your identity and sense of self-worth have become inextricably tied to your occupation and career. What’s more, you may be surprised by how much you miss the camaraderie.
Tip: Minimize the impact of leaving work by fortifying your other relationships now. Increase your involvement in your current activities or join a new club or organization to develop your social network and community.
Anticipate more vacation time
The chance to take frequent and extended vacations is something many retirees look forward to. But the cost of all those vacations adds up, both because you’re paying for more of them, and because of increasing prices, thanks to inflation.
Tip: Well before you retire, map out the approximate number of vacations/trips you expect to take. Factor the costs of those trips with expected inflation and then multiply those costs across the number of years you expect to travel actively. See what that total cost is, and then include that amount in your retirement planning.
Don’t make assumptions about Social Security
If your retirement savings strategy counts on Social Security to be part of your financial foundation in retirement, you could be unpleasantly surprised. Benefits are expected to be payable in full until 2037. But after that, the trust fund’s reserves are projected to disappear, meaning there will be no money left in the account, and current taxes will cover only 76 percent of Social Security benefits.1
Tip: Limit the role of Social Security earnings in your retirement planning by increasing your retirement contributions to both your IRAs and 401(k)s, and make sure to set up an automatic deduction when possible. A steady stream of contributions each month is more effective than a big lump deposit at the end of the year. In addition, if you’re 50 or older, you can make catch-up contributions to your IRA and 401(k) plans.
Assume health care costs will increase
It’s common to underestimate just how steep Medicare premiums can be and the true amount you’re likely to pay for ever-escalating health care costs. One 2015 estimate puts the typical total health care costs per couple over the length of retirement at $230,000 to $260,000.2 And those costs are only going to increase. In addition, it’s uncertain just how Medicare coverage will change over time.
Tip: Stay on top of the rising cost of premiums and other health care expenses by building up a health savings account (HSA) – an account you can put money into specifically for health care costs–over time.
Take the (extra) long view
A person who retires today at the age of 65 can expect to live another two decades or more, according to the Social Security Administration. In addition, American women outlive men by five years on average.3 Of course, that’s good news. But there’s a downside: Your retirement resources may not last as long as you need them to.
Tip: Estimate your retirement expenses now and calculate them out over 30 years to get a picture of what a long retirement can look like. Note: You do not want to go with longevity averages, because there is a significant probability you will live longer than the average. Another alternative is to investigate annuities, which guarantee lifetime income. Take our quiz to assess your long-term retirement vision and learn some tips on taking the long view.
Now, having become familiar with some of the most common retirement traps, you are already better prepared and less likely to fall for them. If you’d like to become even more knowledgeable about planning for the future, consult with a financial representative who can help you create a written financial plan, review it annually, and put you on the path to a thoroughly rewarding retirement.
1 The Future Financial Status of the Social Security Program, Stephen C. Goss, 2010
2 Health Care Costs for Couples in Retirement Rise to an Estimated, $245,000, Fidelity, 2015
3 World Health Statistics, World Health Organization, 2014