Avoid Pitfalls when Planning for Retirement

Kathy Longo, CFP®, CAP®, CDFA Wednesday, 09 August 2017

Avoid Pitfalls when Planning for Retirement

Planning for retirement can be a source of confusion or anxiety for many people. Retirement can be fraught with uncertainty given the fact that many people will face a long retirement period of 25 years plus. While many factors need to come together to make a cohesive and sustainable long-term plan, the biggest concern most people face is the fear of making financial mistakes or decisions based on emotion as they plan for this next stage of life.  Here are some ideas for decreasing anxiety and increasing clarity on the road to sound retirement planning.

Consider the Long Timeframe

People often rush to look at the numbers to determine if they have enough to retire before considering what life in retirement will look like. Although it is important to have a solid foundation of savings and investments, the most important question to ponder is, “what do I want my retirement to look like?” Taking the time to consider the phases of retirement is a crucial exercise to clarify your retirement vision. In addition, a financial advisor can play an important role by asking questions to help align your expectations with a realistic assessment of financial resources to achieve the life you want to lead in retirement.

Although many people plan for retirement with aspirations to live a certain lifestyle, they rarely understand that retirement actually takes place in phases. With a potential 25 years plus to live in retirement, it is important to spend time thinking about your aspirations as people are frequently so busy building a career that they haven’t had time to slow down and consider the phases of retirement. The early years of retirement are an opportunity to pursue activities that might not have been an option during your working years, like hobbies or travel, particularly when you are in good health. It is important to put the expenses associated with this lifestyle in perspective as they can frequently be higher than your normal cost of living. After completing the first phase of retirement traveling and experiencing life, many people start to slow down and consider lifestyle options closer to home like spending time with their children or grandchildren. Finally, expenses can ramp up again in the third phase when healthcare costs increase. Hopefully, your retirement is long enough to get through all three stages and fully aligned with an appropriate savings plan. Avoid the mistake of only saving for the first phase of retirement, as your long retirement timeframe means being prepared for the entire 25 years plus ahead of you. Finally, try to build in financial flexibility as retirement may start earlier than planned due to job changes, family needs, or unexpected health emergencies.

Identify Family Influence

Most people plan for retirement with an emphasis on their personal goals, or the goals they share with a significant other. However, there are risks that you might not have considered otherwise, including other family members. It is helpful to identify potential family commitments that can impact your retirement plan through additional expenses or financial commitments. 

Family ties can have a significant impact on the success of your retirement plan. A long-term plan for retirement may include a gifting component for the next generation, but it may also need contingency plans in place for other situations where your children or grandchildren need immediate financial assistance. We have worked with a number of clients that have needed to step in to keep their kids’ family afloat, covering medical or living expenses, even when it meant sacrificing dollars that had been earmarked for other expenses in retirement. This situation can repeat itself if your parents need assistance, frequently to cover expenses or financial commitments if their retirement money runs out. The important lesson is to understand that your retirement plan may need to include contingencies to potentially cover expenses for other family members. 

Get Started Early

Don’t wait too long to start planning for retirement. You will have more options and opportunities to control the terms of your retirement by building a plan in advance. Early planning should also provide more flexibility as you adjust for the phases of retirement and potential family commitments. Even as you continue working, it feels empowering to know that you are financially ready for retirement. With advance planning in place, many people are pleasantly surprised to know that they are in good shape for retirement. People often set retirement expectations simply because that’s what they see everyone else doing, but determining what is attainable for you will bring genuine happiness in retirement and is an essential element of the planning process.

Early saving for retirement is the best way to improve your chances of accomplishing retirement goals. Even with advance planning, however, it can still be hard to turn off the final paycheck and begin living off your portfolio. We find creating a system for regular withdrawals makes it feel like you are still living off a paycheck. On the other hand, your retirement plan may have a greater chance of success if you consider part-time employment to help fund early retirement goals like travel and hobbies, or other adjustments to incorporate your emotional needs while transitioning from the traditional workforce. Building a retirement plan many years before actual retirement creates more flexibility over time to incorporate unexpected needs or expenses. 

Empower yourself

Getting organized is an effective method of reducing confusion and anxiety as people plan for retirement. It’s fairly common to have a myriad of retirement accounts with overlapping objectives (IRAs, 401(k)s, insurance policies, bank accounts and other investments). Since most people are simply too busy working and saving to keep all of these accounts organized effectively, empowering yourself through financial organization helps to create a structure for your planning process. If you feel alone in your struggle with organization, please know that these concerns can be addressed by partnering with a financial advisor to help calm fears of the unknown. 

Another opportunity to empower yourself in preparation for retirement is to schedule routine financial tune-ups. Similar to keeping your car in good shape, scheduling financial tune-ups on your calendar creates time to check on your savings and spending goals to stay on track with your retirement goals. This is a great time to reflect on potential life changes over the past year (family, work, lifestyle) that may create opportunities to accelerate your retirement timeline, or potentially delay retirement a few years. We also encourage people to examine their budget and hopefully find a way to save 1 percent more from your paycheck, as the additional savings still have time to grow with the power of compounding. Speaking of investments, review your portfolio to make sure it still aligns with your retirement timeframe (including the 25 years plus of retirement) and potentially rebalance investments to your targets if that is possible without creating a tax burden.

Having trust in your retirement plan that you proactively created to resolve any challenging issues in retirement is a source of comfort for many people. Retirement planning can bring up a range of feelings and knowing that you have diligently planned for a variety of contingencies can help even the most nervous person feel better. For many people, having a skilled financial advisor working with you throughout the planning process will help keep your expectations current and your confidence high. Hopes and expectations often shift as time goes by, and your journey through life is constantly changing, but having confidence in your plan and potentially partnering with a financial advisor can help keep your retirement plan on track for success. 

About the Author

Kathy Longo, CFP®, CAP®, CDFA

Kathy Longo, CFP®, CAP®, CDFA

Kathy Longo brings over 25 years of expertise and experience to Flourish Wealth Management. Kathy is wholly dedicated to improving the life of each client and finds joy in making complex matters simple and easy to understand. She excels at asking the right questions, uncovering new possibilities and implementing the most advantageous strategies for success. Playing such a pivotal role in her clients’ lives remains an honor and a privilege. After earning a degree in Financial Planning and Counseling from Purdue University, she began her career at a small firm in Palatine, Illinois where she worked directly with clients while learning to build a viable, client-centric business. Over the years, she gained extensive knowledge and wisdom working as a wealth manager, financial planner, firm manager and business owner at notable, various sized companies in both Chicago and Minneapolis.

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