Unfortunately, “retirement planners” don’t exist. What do exist, however, are certified financial planners™, who can help you with your retirement planning.
And they’re happy to share their wisdom. In fact, we picked the brains of two experienced CFPs® to find out some of the most common mistakes their clients make—so you don’t have to.
1. Operating Without a Goal
Estimating how much money you need to save can be tricky … but that doesn’t mean you should go in blind. After all, that’s a real recipe for disaster. Katie Brewer, CFP® with LearnVest Planning Services, says that she sees many people saving for retirement without any particular goal in mind, which can keep them behind schedule and coming up way short when it’s time to quit your day job.
To estimate how much money you’ll need after you stop working, Brewer points to a figure called the “replacement ratio“—that is, how much of your income you need to “replace” for each year you’re retired. “For a financially secure retirement, meaning you’re neither on a tight budget nor are you splurging on cruises and five-star restaurants, we recommend planning to replace 70% of your former income—though that figure can vary based on your overall financial picture,” Brewer explains.
If you’re the type who’s going to drastically reduce your living expenses and keep yourself on a tight rein once you retire, you could probably make do with about 60%, again depending on your individual circumstances, she says. And if you want to live just as you’re living—plus some amazing round-the-world trips, you should estimate saving enough to replace about 80% to 100% of your former income.
From there, work backward: How much do you need to save now to get there? Many brokerages offering retirement plans have calculators right on their websites, says Brewer, or you can use free calculators through sites such as FINRA and Bankrate, which allow you to plug in facts like how long you have until retirement and show how much your savings could grow in that time. While those calculators can help you with a rough estimate, you may want to work with a financial planner to make sure you’re on track.
OK, we get it: It’s nice outside. You’ve got years to go. Nobody but the fictive retirement planners really wants to think about retirement at all. But when it comes to saving for it, there’s no bigger advantage than starting early.
Brewer works with a lot of people who put off saving for the future like any other chore: “I’ll do it after I get a promotion,” “after I’m earning more,” or “after I’ve made a bigger dent in my student loans,” they tell her. “But when you keep putting it off, it’s all too easy to get to retirement and find out you don’t have nearly enough saved,” she cautions.
She recommends opening an account as soon as possible and setting up an automatic contribution from your paycheck, no matter how small. “Even if you can only contribute 1% for now—that won’t get you to retirement, but it will get you closer than you are today,” Brewer explains. To make sure you continue increasing your contributions, she suggests setting a monthly, biannual or annual calendar reminder to up what you’re contributing by another percentage point … or two. (Sometimes, you can even automate this through your retirement plan.) “You don’t want to realize five years before you plan to retire that you’re behind on your goal,” she points out. “Putting away 10% now will be a lot less painful than putting away 50% later.”
3. Approaching Retirement With Outsized Home Costs
Entering retirement with a mortgage isn’t necessarily a bad thing. Entering retirement with a mortgage—or even a home equity loan—you can’t afford, however, is a potential disaster.
“I see people with too much in real estate debt, which is quite often a HELOC on top of a mortgage,” says Judy McNary, CFP® with Colorado-based McNary Financial Planning, referring to a home equity line of credit, which lets homeowners borrow against their home’s equity.
She points out that a certain amount of debt is manageable—even good—but massive debts such as HELOCs tend to make covering your retirement costs tricky, as retirees with this much debt need to set aside much more money than someone who has paid off their major loans to pay down their housing costs.
For that reason, McNary recommends prioritizing pre-retirement repayment of that debt. “If a client can pay off the home equity line, it generally will get them to a state of debt they can support with what they want to live on in retirement,” she says.
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