When we're young, we tend to think about retirement as though it's just a really long, really great vacation.
We picture a house near the beach or a golf course. We can get out of bed when we please, stay up all night if we want, and never worry about another missed deadline. A frosty beverage is always at hand, and there's a hammock waiting in the shade.
But as we grow older and retirement gets closer, that enthusiasm often turns to angst. We have to figure out how the heck we're going to pay for the lifestyle we want when the paychecks stop -- and that can be a challenge, even for the savviest of savers.
Here are six mistakes to avoid when planning your dream retirement:
1. You do not have a plan.
Your No. 1 goal in retirement should be to know how much you will have coming in each month from all of your income streams -- and how you'll make that money last. Most prospective clients I meet with have a broker who helps them choose and purchase investments, but they don't have a holistic, written retirement plan that covers five key areas:
· Income (how you will pay yourself)
· Investments (how you will keep growing your money while also keeping it safe)
· Taxes (how you will hold onto more of the money you worked so hard to save)
· Health care (how you will deal with the short- and long-term care expenses that could significantly reduce your nest egg as you grow older)
· Estate (how your spouse, children and favorite charities will be taken care of when you die)
Your plan is your guide to and through a successful retirement.
2. You have never had your portfolio stress-tested.
One of the first questions I ask clients is how much money they're willing to lose if there's a market downturn. They always say zero. Of course, that isn't an option in investing; to earn a return, you must take on some risk. But we usually can land on an amount they can handle, both financially and psychologically. Software (such as the Riskalyze program we use) can help determine your risk tolerance -- and whether that's what your current portfolio is built for. Most people are surprised to see how aggressive their investments are compared with their comfort level. This can be fixed -- but first, you have to know where you stand.
3. You do not have a tax plan.
Investors often underestimate how much they will pay in income taxes after they retire. Some aren't aware that up to 85% of their Social Security benefits can be taxed. Others forget that Uncle Sam owns a portion of their 401(k) or IRA if they aren't in a Roth account, and when they take out their money, they'll have to pay him his share. Many are under the (usually mistaken) impression that they'll be able to live on far less income during retirement. I recommend working with a CPA who understands retirement income tax planning. And it's always a plus if your financial adviser and tax professional are working as a team to maximize tax efficiency.
4. You have an unrealistic income plan.
Many of the income plans my prospective clients come in with use a high rate of return that, at best, is a reach; they use minimum inflation protection rates and low tax rates; and there are no assets set aside for health care costs. A plan like that could leave you in a vulnerable situation. I prefer to build a more conservative plan, and if it turns out you have more money to work with than you thought, its gravy.
5. You do not understand investment fees.
Most investors don't know how much they pay in fees, which can be layered and complicated. When we run software to identify those fees, we find some people are paying as much as 3%. That may not seem like a lot, but if you look at a $1 million portfolio with an 8% rate of return over a 30-year period:
· A portfolio with 3% in annual fees will have $4.0 million.
· A portfolio with 2% in annual fees will have $5.5 million.
· A portfolio with 1% in annual fees will have $7.4 million.
The power of compounding interest is a beautiful thing -- and you want to make the most of every penny you put away. Pay attention to your prospectus, and don't be afraid to ask about fees. Your vigilance could save you thousands or even millions of dollars over the course of your retirement.
6. You do not have an estate plan, or you don't update it regularly.
If you don't have an estate plan, the state in which you live has one for you -- and it likely won't be anything close to what you wanted for your loved ones. Again, it's best if your adviser is working with a CPA and an estate-planning attorney. Most people need a will, a living will and a power of attorney, which should cost around $400 to $600, depending on the attorney. You also may need or desire to draw up a trust. If your legacy is an important part of your retirement dream, your wishes should be included in your comprehensive plan.
If you're closing in on retirement -- or if you're already there -- putting together your written plan should be a priority. And if you've been fretting, knowing that you have a guide to go by can make your retirement dreams feel a little more doable.
Just make sure your adviser includes a way to pay for the occasional umbrella drink and at least one big comfy hammock.