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Retirement

Biggest retirement planning mistakes and how to solve them

  • March 17 2020
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Retirement

Biggest retirement planning mistakes and how to solve them

By Zarah Mae Torrazo
March 17 2020

There are several retirement planning mistakes you may not even realise you are making. To get you on track, read up on how to identify and solve these problems. 

Biggest retirement planning mistakes

Biggest retirement planning mistakes and how to solve them

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  • March 17 2020
  • Share

There are several retirement planning mistakes you may not even realise you are making. To get you on track, read up on how to identify and solve these problems. 

Biggest retirement planning mistakes

As the saying goes, “To err is human.” However, some mistakes can have heavier consequences compared with others. One example is making certain mistakes when you are planning for your retirement. 

In retirement, all your work to build up your nest egg (or the lack of one) will come into play. Retirement is a stage in life unlike any other where you must have sufficient funds to sustain a long period without salary and ensure that you will also enjoy the journey after years of being employed. There are several critical mistakes that people make when planning for retirement, some of which you might not even realise you are making. 

To get your retirement planning on track, we encourage you to read up on these common mistakes people make when preparing for retirement and learn how you can solve them. 

Not making a retirement plan

“If you fail to plan, you are planning to fail.” This statement applies to retirement. One of the biggest mistakes people make is not planning properly for their life post-work: when they want to retire, how much money is needed, and how big of a nest egg you would need to generate that much income. 

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Planning your retirement can be overwhelming, and you may be confused by a lot of important choices that you should make. However, avoidance and inaction are perhaps the most costly mistakes you can make.

Solution: 
Consider working with a financial planner to discuss your retirement and see which financial plan will work best for you. A solid financial plan will serve as a road map that can indicate your destination (in this case, a comfortable retirement) and the best way to get there. 

Your plan should contain investment advice and information about the level of risk attached to your investments. You should also have basic understanding about how your superannuation account and your retirement accounts (if there are any) works. A good plan will take into account issues like what insurance you should take, your taxation status, budget and other retirement issues. 

Saving too little, too late

Financial advisers will tell you that saving young and saving small amounts on a regular basis is the best way to earn financial independence when you retire. Most people open a superannuation account when they join the workforce to jumpstart their retirement savings. 

However, research shows that people may not be saving enough for retirement. Recent data from the Association of Superannuation Funds of Australia indicate that most people’s balances are below the threshold they would need to have a comfortable retirement. 

One of the main reasons why people don’t have sufficient funds for retirement is their lack of understanding of how much money they’ll need in retirement. According to finder.com.au, only 42 per cent of people know their superannuation balance. Further research indicates that a significant percentage of Australians are not aware of how much money they will need to achieve financial security during their retirement. 

Solution: 

Take the guesswork out of the equation when planning for your retirement. Be updated on your super balance. Use a retirement calculator to know how much super you’ll have when you retire and if it will be enough to finance the lifestyle you want during your retirement.  

To boost your savings, consider additional contributions to your retirement funds. Here are some strategies you can consider to boost your super balance.

  • Salary sacrificing/concessional tax contributions: Under this strategy, you can rearrange your income so that employers pay a percentage of your pre-tax salary to your super fund.Your contributions are taxed at 15 per cent and must not exceed $25,000 per year. Speak to your payroll department to set up a salary sacrifice. 
  • After-tax contributions/non-concessional tax contributions: If your workplace does not offer a salary sacrifice scheme, you are unemployed, self-employed or simply don’t want to salary sacrifice, you have the option of making a personal tax-deductible contribution to your superannuation account. It is also subject to a 15 per cent tax and a $25,000 limit per financial year. 
  • Spouse contributions: If your partner has no income or has a pay lower than $40,000, contributing to their super could be financially beneficial for both of you. Check the Australian Taxation Office website if you are qualified for this option. 
  • Government co-contributions: If you are a low or middle-income earner, check if you are eligible for a government co-contribution. In addition to boosting your super balance, there is a super tax offset available to people who earn less than $37,000 annually. 

The earlier you start contributing to your super funds with any of these options, the bigger your super fund will be at the end of your career. These additional contributions will significantly benefit from compound interest. To read more on super contributions, click here.

As you invest more money in a super fund, you will also be more knowledgeable about a range of managed investment options, including balanced, capital stable and growth fund options. Taking these steps will allow you to be in a better financial position come retirement.  

Underestimating retirement costs

According to Forbes, an average person will need to replace 80 per cent to 90 per cent of their pre-retirement income in retirement. When estimating how much retirement savings is needed, most people only account for their basic financial needs, including housing, food, utilities and daily expenses. But calculating your retirement savings using this method can be inaccurate. People generally underestimate how much money they will need in retirement.

One common mistake people make when planning for retirement is forgetting to consider unexpected costs later in their life. According to Roberto Castaneda, the program director of accounting and finance at Walden University, people often fail to fully account for two major expenses in their retirement budgets: healthcare and inflation.

People often underestimate the cost of healthcare in retirement, which can cause financial stress during their golden years. Older people are generally higher users of health services compared with younger people and are also more likely to have several long-term health issues. 

Solution:

Healthcare cost is one of the biggest risks to retirement security, so it is necessary to plan for this major outlay and have an understanding of the healthcare system. Check public and private resources to help you plan. Do not wait until retirement to seek advice and consider all your options. 

Another factor people discount during their financial planning is the impact of inflation on savings. The rate of increases in wages has surpassed the inflation rate. The risk of rising inflation is not significant while you are employed. However, when you enter retirement, the risks of inflation on your retirement savings increase. The cost of medical care has also historically increased at a faster pace than overall inflation. 

One way to combat inflation eroding your savings is to ensure that a portion of your retirement is invested to keep up with the rate of inflation. This is where the diversification of your investments comes into play. 

Retiring too early

Most people dream of retiring as soon as possible. However, doing so without thinking through your finances can cause problems. 

While there is no official retirement age, Australians tend to retire in their mid-to-late 60s. At this point, several years or decades of compounded interest from their savings account and a seemingly healthy superannuation balance can look like a good safety net for most people. 

However, the unexpected costs mentioned above can quickly change the situation. Other events, such as recession, public health emergencies and calamities can also put your retirement savings at risk. 

Solution: 

Prepare for the worst-case scenario when planning for your retirement. Learn how to protect your retirement savings from recession and other economic downturns. While the probability of such events happening is low, being unprepared can have catastrophic effects on your retirement. 

If you are concerned that you will not have enough funds during your retirement, you can (if your health allows it) consider extending your working life by a year or so to boost your savings and super balance. The delay can have a substantial impact on the retirement funds you will build up. 

Not updating your retirement plan

Another mistake people make is not revisiting their retirement plan every few years. If you have crafted your retirement plan five years ago, there is a possibility that it is based on a financial status or lifestyle that is no longer relevant. 

Did you get married? Are you working with a bigger salary? Or do you have a bigger family? People planning for retirement tend to forget that these personal milestones can have an impact on their future financial status. 

Solution:

Majority of financial planners will create a retirement plan and revisit it every five to 10 years. However, it is advised to revise your plan every three to five years or if there are any major changes to your life so that adjustments can be made accordingly. By adapting your retirement plan to these changes, your retirement plan will continue to be in tiptop shape. 

Conclusion

To sidestep these common retirement mistakes, you have to be realistic about your plan and think ahead. It is also important to set goals before retirement and, having made some calculations, to be able to update your game plan when life conditions change. Seek help from a financial adviser to help you start, stay or get back on track on your retirement planning. 

Mistakes are bound to happen along the path, with unexpected factors throwing a wrench in the works and creating a need to constantly adjust what seems like a solid plan. But being aware of these mistakes (and avoiding them) will help you secure a stress-free and financially stable retirement. 

Did you make any of these retirement planning mistakes? Explore nestegg to learn more about retirement planning. 

Biggest retirement planning mistakes and how to solve them
Biggest retirement planning mistakes
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