9 dumb moves to ruin your retirement
Do you like excitement? Follow these surefire ways to live out your golden years on the edge of a steep cliff.
Many people carry their retirement concepts around in their heads.
They may imagine a luxurious recreational vehicle parked near a Florida theme park. Playing golf. Boating. Shopping. Taking a creative-writing class. Gardening. Who wouldn't look forward to such a future?
Smell that coffee? Retiree wannabes need to indulge in some serious reality tweaking or their dreams will hit the wall faster than a roller-derby queen on a greased track.
Calculator: Run the numbers on your retirement
If you crave the rush that comes from having to cash in empty beer bottles to pay your mortgage, here are a few strategies guaranteed to turn your retirement into one memorable financial catastrophe after another.
Buy more home than you can afford
There's no time like retirement to grab that McMansion you've always wanted. By opting for a house that'll turn into an albatross in the face of climbing property taxes and soaring insurance premiums, you can ensure your home will become a real burden in your old age. Another instant path to bag-lady-hood: escalating maintenance and upkeep.
Dave Ramsey, a personal-finance expert and talk-radio host, says to temper wants with needs. He cited a recent poll in which 80% of Americans said they believed their standard of living would go up at retirement.
"Our culture today tells us that we deserve to have everything we want because we can charge it," Ramsey says. "Previous generations thought you could only have something if you could pay for it. Their lifestyles were much simpler, and retirement was a time to simplify even more."
Do it right: Pay off your debts, including your home if you can afford to do so, before retiring. If you have to move, or simply want to, don't buy something you can't afford in the long term. And minimize repairs by keeping up with the maintenance.
Ignore the effects of inflation
You calculated your cost of living against your projected retirement income, and things look pretty darned rosy. Chances are you didn't factor nasty old inflation into your budget.
Assuming an inflation rate of 2.2% that rises to 3% starting in 2017, what costs $10,000 in 2008 will go for $12,528 by 2018. In 2028, that figure will rise to $16,837. And in 2038, you'll need $22,628 for the same expenditure. If 2038 sounds like "Star Trek" and beyond, look at it this way: If you retire at age 55 in 2008, you will be 65 in 2018, 75 in 2028 and 85 in 2038.
People live longer these days, but unfortunately for many, their money won't go the distance.
Richard Suzman, the director for the Behavioral and Social Research Program at the National Institute on Aging, says that although life-expectancy gains have slowed in the past few years, we're in for another upturn.
"If that happens, more people will be outliving their resources," Suzman says.
Do it right: Calculate future expenses with an eye on both inflation and increased longevity.
This means allocating a portion of your nest egg to higher-risk, higher-return investments such as equity mutual funds or purchasing an immediate annuity with an inflation-adjustment component.
Raid your 401(k) early
Not everyone is lucky enough to have his or her own personal loan company, but with a 401(k), you can borrow your own money and, even better, pull it all out if you change jobs. What a cool way to pay off your credit cards or buy that boat you've always wanted. Not.
Getting your hands on a boatload of cash might seem tempting, but Bonnie Fawcett, the director of 401(k) programs at PNC Financial Services, says going into your retirement savings before you retire should be a plan of last resort.
Do it right: Dip into your 401(k) only when there is no other choice and the reason is an especially good one, such as purchasing your first home.
Count on Social Security
You don't want any regrets when you look back at your life, so you've made a habit of living for the moment. Now the moment when you want to retire is nigh, and you plan to let the government take care of you. Way to go -- that's the kind of thinking that could land you below the poverty line in retirement.
Social Security has helped lower cases of poverty among the elderly in this country, but it stands on unstable financial ground.
"It's never too late to start saving and investing for retirement, but you have to get intense and do what it takes to win," financial expert Ramsey says. "If you aren't willing to sacrifice, you won't get anywhere."
Do it right: Diversify your sources of retirement income as early in the game as possible. That means save in as many different types of tax-favorable investment vehicles as you can manage, such as a 401(k) plan and an individual retirement account. And save as much as you can.
Assume your retirement benefits won't change
Just because you were promised something doesn't mean it will come true. Don't believe it? Ask the employees at General Motors, IBM, Alcoa, Sears, Circuit City, Hewlett-Packard, Lockheed Martin, Motorola -- the list goes on and on. These companies have frozen their pension plans, which means future benefits stop building up for some or all of their employees.
Other companies have terminated their pension plans or converted them to so-called cash-balance plans, which are calculated differently -- to the disadvantage of older workers. Even the government is chipping away at pledged benefits.
"Make sure you've got an adequate reserve for large out-of-pocket expenses," says Suzman, of the National Institute on Aging.
Do it right: Don't take anything for granted. Make sure you set aside your own funds for retirement. Always have a plan B.
Let the kids' needs trump yours
You started saving money for Junior's education the minute he showed his face, but in the process you neglected to put anything aside for retirement. The result: Junior has a nice fat college fund, and you'll be working until you're dead. Unless you relish raiding your change jar to pay your electric bill, bump Junior's college fund down a notch on your list.
Paul Hodge, the director of Harvard Generation's Policy Program and chairman of the Global Generations Policy Institute, says there's nothing wrong with a kid waiting tables to help pay for college. It might even be character-building.
"If you set money aside for retirement, then you won't be a burden on your children later on," Hodge says.
Do it right: Pay yourself first. The 529 college-savings plan takes a back seat to the 401(k) plan.
Depend on your partner's income
Many seniors have a tough time making it on two incomes, much less one. Here are some of the facts about surviving on inadequate retirement, according to Ramsey: "USA Today reports that out of 100 people age 65, 97 of them can't write a check for $600, 54 are still working and only three are financially secure. Bankruptcies among those 65 and older have gone up 164% in the last eight years."
Whew! That's scary stuff and a long way from that golf-playing, globe-trotting, low-stress retirement you envisioned.
If those numbers make you nervous, consider that thousands will face even more-reduced circumstances because they've failed to consider that a big chunk of their income might end up missing in retirement. Death and divorce happen, and they change everything.
Hodge says women are particularly vulnerable to impoverishment after hitting retirement age. "Their biggest mistake is that they assume someone else will take care of them," he says.
Plus, women's careers often are cut short with caregiver duties for kids and parents.
Do it right: Women in particular should consider how dependent they are on their marriage when making retirement plans. Don't assume anything, and take a hard look at survivorship aspects of pension plans.
Plan to work forever
The only senior with a guaranteed gig is Santa Claus, and that job's taken. Age discrimination may be illegal, but it's alive and well, and bound to affect your job plans. In addition, many professions such as law enforcement, the military and aviation have mandatory retirement ages. And that's not all.
"A lot of people forget about becoming disabled," Hodge says. Diseases associated with aging, as well as other conditions, can limit what you can do, effectively cutting short your post-retirement career.
Do it right: Continuing to work may not be in the cards for you. Turn employment into one of many elements of your retirement picture, not a major and irreplaceable component.
Don't worry about health costs
You look great. You feel great. You're active and haven't been sick a day in your life. You're worried about your golf game, not health issues.
But like it or not, aging often means deteriorating health, even for those who think they've done everything right. And deteriorating health means more money for health care. Really bad health can force retirement off track and turn your finances into a train wreck.
Besides the broken pension promises mentioned earlier, health benefits for retirees are slowly disappearing. According to a recent study by the Kaiser Family Foundation and Hewitt Associates, the percentage of large companies (with 200 or more employees) offering these benefits fell from 66% in 1988 to 33% in 2005.
Medicare does not cover everything, so many health-care expenses fall on underinsured retirees. For couples retiring today, Fidelity Investments recommends a reserve of $215,000 just to cover medical costs.
Besides saving up cash, you can be proactive and take care of yourself. "A lot of what people should and shouldn't do is well-known," the aging institute's Suzman says. "Get to an appropriate weight and (take advantage of) all sorts of life-saving immunizations and tests."
Do it right: You can't forestall ill health forever, but you can live a healthier lifestyle starting now that will reduce your costs up the road. Eat fewer salty snack foods and more fruits and vegetables. Take daily walks or otherwise move your limbs. Your body will reward your efforts.
Unless you like the thought of pinning your future on shaky government programs or handouts from relatives, take charge now. Once you're comfortable that you're sufficiently preparing to meet your retirement goals, grab those clubs and hit the course or go putter in your garden. It's time to reward your forward-thinking with a few birdies or begonias.
This article was reported and written by Carole Moore for Bankrate.com.
Published Oct. 22, 2007
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