Spotting oversights in your retirement plan early can lead to years of financial stability.
If something doesn’t seem right in your retirement savings strategy, the best time to figure out where improvements could be made is now. Catching pitfalls early can help you secure a comfortable retirement later. Here are some warning signs that something might be wrong with your retirement plan, as well as simple fixes to get back on track.
1. There’s no plan. If you have been sporadically saving or occasionally putting funds into a 401(k), it’s time to sit down and see exactly how much you have. “While there are more and less optimal ways to approach your retirement, any plan is better than no plan at all,” says Benjamin Sullivan, a certified financial planner with Palisades Hudson Financial Group in Austin, Texas. Start by talking to a financial advisor and your employer to learn about your options. You might find out you can put more in a 401(k) each year, or you may decide to put a specific portion of your paycheck each month in an individual retirement account.
2. Nothing is automated. If you look for extra cash to stash away at the end of the month after your other expenses have been paid, you could quickly fall short of your retirement goals. To turn the situation around, make savings an automated process that comes directly from your payroll or checking account each month. “Cultivate the habit of paying yourself first by deducting funds for your retirement account before any other expenses are deducted from your paycheck,” says Alexander Lowry, professor of finance at Gordon College. “You will find it easier to adjust to living on the balance of what’s left.”
3. All your money is in one investment. Diversity is key when it comes to retirement planning, and your portfolio should reflect that strategy. “With markets being volatile, it’s tempting to want to keep most of your retirement assets in conservative asset classes such as cash or certificates of deposit,” Lowry says. “But these products are likely to underperform the market and not keep up with the rate of inflation.” To create balance, aim for a portfolio allocation with a mix of stocks and bonds that reflects your risk tolerance.
4. No meetings with your financial advisor. While meeting with a financial advisor can help you get started on retirement planning, it’s also important to check in regularly to see where improvements could be made. “If you made a retirement plan once but you haven’t revisited it in a while, your retirement plan could be off track without you noticing,” Sullivan says. You might need to adjust the plan if you recently got married, had a shift in your career path or moved to a different home.
5. Failure to factor in rising health care costs. A couple retiring in 2018 will need an estimated $280,000 to cover health care costs in retirement, according to research by Fidelity. With health care costs expected to rise in the coming years, it’s essential to consider these upcoming expenses when planning for retirement. “A qualified retirement financial planner can help you conduct a thorough analysis of maintenance costs, insurance premiums, co-pays, deductibles, prescriptions and estimate possible long-term care expenses to help you better prepare for retirement,” Lowry says.
6. Saving regularly but not enough. If you are setting aside 5 percent of your income each year toward retirement, you’re likely off to a good start. But you will have a more comfortable retirement if you increase your savings rate. “Your savings rate has the greatest influence on your ability to achieve your retirement goals,” says Stuart Ritter, senior financial planner at T. Rowe Price in Baltimore. “You should be saving at least 15 percent of your gross household income, and that includes any employer match you may be receiving.”
To reach the 15 percent mark, look at your current budget and determine if adjustments can be made to certain areas. You might be able to cut back on entertainment-related costs, dining out or other areas to put an additional amount toward retirement. Saving just a few percentage points more of your income each year could ultimately lead to hundreds of thousands more when you retire.
7. Financially supporting others at your own expense. Whether it’s an adult child who has moved back home or an aging parent, providing financial assistance to family memberscould be costly down the road. “It is incredibly difficult to be financially independent when others are financially dependent on you,” says Kurt Rossi, CEO of Independent Wealth Management in Wall, New Jersey. “While financially supporting family may be critical, it is important to avoid overextending your financial support to the detriment of your personal long-term financial goals.” You might need to reduce the amount you are spending to support others so that you can put those funds toward your own financial future.
8. Retiring with debt. If you currently carry high credit card balances or have a home equity loan or a substantial mortgage, it may be time to work on getting rid of those balances. “Many retirees carry a substantial debt burden with them into retirement,” Rossi says. Addressing your loans now may free up cash that could be put toward other living expenses in retirement. “Consider taking a proactive approach to addressing your debt, even if it means that you must downsize your home or other assets to eliminate debt levels before retirement,” Rossi says.