Are you ready to dodge a few bullets, so that you can be confident in your retirement plan?
Well then, soldier – gear-up, because you’ve just entered retirement planning boot camp. You’re going to learn some of the biggest retirement planning mistakes, blunders and pitfalls to avoid as you wind-down work and ease into retirement.
5 Biggest Retirement Planning Mistakes
Retirement planning mistakes are made by retirees every single day. Sadly, you will most often be oblivious to mistakes you’ve made, because you didn’t even realise you made a mistake!
You see, the most common mistakes that you will make are not mistakes that will get you in trouble with the tax department, or cause you to contravene super rules. Instead, the mistakes you make will cause your retirement savings to run out 10 years too soon, cause you to work longer, or result in you missing out on opportunities available to you that will give you a $70,000 per year retirement income, rather than a $50,000 per year income.
Let’s go through the 5 biggest mistakes you can make when planning your retirement.
1. Working Too Long
In my experience, there’s a pretty good chance you’re going to end up working too long. This is the saddest part of people transitioning into retirement. Of course, it’s always best to be conservative with retirement planning, but many people are way too conservative. Most of the people we work with had intended on working at least 3 or 4 years longer than they needed to until we explained they didn’t have to.
Some of the best years of your life are going to be in your 60s. Do you really want to lose these years by working too long, because you didn’t bother going through the process of figuring out whether you actually had to or not?
2. Not Optimising Your Contribution Strategy
In your final working years (and even months), you need to hyper-focus on your super contribution strategy. This is where you can significantly reduce immediate and future taxes by increasing super contributions, especially if you’re still working.
There are a number of types of contributions that can be made into super, including:
- Salary sacrifice super contributions
- Personal concessional contributions
- After-tax contributions
- Spouse contributions
- Small business contributions
- Downsizer contributions
The types of contributions you should make and amounts will be determined by your particular circumstances, such as your taxable income, age, intended retirement date, super balance, employment status, and whether you are single or a member of a couple.
Usually, in the lead-up to retirement, you want to be getting as much of your wealth into superannuation. However, this needs to be done in a tax-effective manner, within the super contribution limits and for the right reasons.
Neglecting to implement an efficient contribution strategy is the most common mistake people make when saving for retirement.
3. Investment Risk & Return
My mantra is that you should only take on as much investment risk as is required to meet your objectives.
Many people say, “I want to earn more than bank interest”, or “The sharemarket is too risky”, or “My neighbour’s super earns more than mine”. But none of this provides any type of context or validity around the level of risk you should accept with your investable super balance. You have worked many years to build up your retirement savings, so great thought should be put into how you are going to make these funds last throughout retirement.
You need to think about everything you would like to achieve at and throughout retirement (goals and objectives), the level of contributions you should make between now and retirement (contribution strategy) and then the level of investment return required to meet your retirement objectives and the commensurate risk associated. Risk can be defined as the certainty or probability of achieving an expected long-term return.
Generally, a higher level of risk will result in a higher long-term return (albeit with higher fluctuations in your balance and a lower certainty of eventual outcome). Conversely, a lower level of risk is likely to produce a lower comparable long-term return (with lower levels of volatility and a greater certainty of eventual outcome). However, this also assumes a diverse portfolio of quality investments.
The risk of your portfolio should be consistent with the return required to achieve your objectives and the level of risk you are comfortable with. Comparing your super investments and returns with the flavour of the month or what your friends and family are earning is one of the biggest pitfalls of retirement planning. You should be focusing on yourself and your goals only.
The super investment options offered by your super fund should explain the expected return and level of risk associated with each option.
4. Failing To Take Into Account Inflation
Each year, the cost of living increases as a result of inflation. In 10 years’, you’ll need around $80,000 to buy you what $60,000 buys you today.
Failing to take into account inflation is one of the biggest mistakes a retiree can make, because inflation causes the dollar to lose its purchasing power over time; meaning you need to consider the investment returns required to keep up with inflation. Bank accounts and term deposits, for instance, have no growth component and therefore lose purchasing power every single day.
5. Not Factoring In Social Security
Occasionally, I hear people saying that because they have $800,000 in super, they can spend $40,000 per year for 20 years ($800,000/$40,000), at which stage they will have no money left. This is a major over-simplification of retirement planning calculations because it fails to take into account investment earnings, inflation and social security payments.
The Age Pension provides at least a partial level of support to a large majority of Australian retirees and, while eligibility criteria may change over time, the payment will remain an integral pillar of Australia’s retirement system for many years to come.
Some people also write-off the Age Pension because they do not expect to be eligible for payments immediately upon attaining age 67, without realising that it will be a significant supplement to their income in their late 70s or early 80s, as their retirement savings begin to deplete.
Now, of course, you can take the over-conservative approach by not including Age Pension payments in your retirement calculations (as a worst-case scenario), but that would mean you’ll be working an extra decade and missing out on your youngest and most enjoyable retirement years. Heck, you may as well not get on a plane either, in case it falls out of the sky.
What is the Number One Mistake Retirees Make?
The number one mistake retirees make in the months and years leading up to retirement is not adequately developing their plan to transition into retirement, optimise their super contribution strategy and project the longevity of their retirement income.
This is not an easy task, which is why – if you were ever going to obtain professional retirement advice – now would be the time. Too many mistakes can be made at this point in your life. You do not necessarily need to build a long-term relationship with a financial adviser; in fact, you shouldn’t need to. A one-off plan for retirement should give you a huge head-start to where you would otherwise be.
It amazes me how many people are willing to wing-it when it comes to planning their retirement.
You’ve worked for 30 years and are now a few months or years away from living some of the best years of your life with no responsibility to your business or employer. Yet, you’re willing to risk all of that rather than seek professional retirement planning advice?
Would you perform surgery on yourself, build your own home or fly yourself to Europe, after studying up online for a few weeks?
Not only will professional advice (from the right person) put you in a better position, but it could even prevent you from making a huge financial blunder that will reverberate throughout your retirement years. Explain that one to your partner!
Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
Discover More Content on SuperGuy: