The top retirement mistake people make
And how YOU can avoid the pitfalls of saving for retirement
|Written by Tom Yeung, CFA | CDFA|
Investment Advisor & Fund Manager, Jurnex Financial Advisors
Saving for retirement can be confusing. There’s a lot of information out there and it’s hard to know whether you’re on the right track. In this article, I’d like to share with you the #1 top retirement mistake high earners make.
Let’s start by examining the OTHER mistakes people make:
6. Forgetting to rebalance their portfolio
5. Retiring too soon
4. Underestimating medical expenses
3. Spending too much too early
2. Not having a long-term plan
At Jurnex, I’ve found there’s a number one, much bigger mistake people make when planning for retirement. The top retirement mistake high earners make is:
1. Pretending like the issue doesn’t exist
Part I: Pretending like the issue doesn’t exist
In this first part, we examine how easy it can be to overlook retirement issues
Facts do not cease to exist because they are ignored – Aldous Huxley
If you ignore an issue, that issue suddenly becomes impossible to solve. It’s true for any problem. On a national level, we ignore issues all the time – the national debt, immigration reform, tax simplification, and so on. We know a lot of things are bad for us, but we do it anyway. Smoking, drinking, eating junk food, not getting enough exercise.
We all know things that need improving. Yet we often sweep these issues out of mind. This is especially pernicious when it comes to talking about money. Do you recall those five other mistakes people make in retirement? All those problems can be solved if solve the top retirement mistake high-earners make: to acknowledge that retirement is something we MUST manage.
Case Study: Jerry and Janet
Let’s use an example to illustrate. Jerry and Janet both work full time (names have been changed to protect privacy). Both are in their late fifties. Their two adult children had both recently graduated college and are starting careers of their own.
Jerry and Janet enjoy their jobs. Jerry is an upper-level manager at a local chain store, while Janet helps oversee operations at a local hospital. They have matching 401(k) plans at their employers. And given their dual incomes, their financials have always been quite stable.
Jerry and Janet spend their time hard at work
On average the two of them spend 45 hours a week at work. This isn’t unusual: the average American worker spent an average of 42.5 hours per week working, according to the US Bureau of Labor Statistics. The only activity we do more is to sleep (47.6 hours per week).
We spend so much time working that we sometimes forget to understand why we’re doing it. Because besides personal fulfillment, there’s one key reason why people also work: to provide ourselves and our loved ones.
They also spend their time on hobbies
Jerry and Janet spend their leisure time pretty much on-par with the average American. Last year, Janet told us she spent around 30 hours planning the family’s annual vacation. This is not too far from average. According to Expedia, consumers visit 38 sites before booking
Jerry, among his other past-times, plays Fantasy Football. The average American worker spends 6.9 hours per week on their Fantasy Football team, and Jerry is no different.
(He claims to do better than average, but we are skeptical)
But how much time did they spend planning for retirement?
Given the couple spend 8.0 – 8.5 hours a day at work, how much time do you think they spent planning where their earnings all go? The answer might shock you:
The couple had spent just 5 minutes of planning. This number wasn’t just per-year. This was 5 minutes. EVER.
When Jerry and Janet started working at their employer’s twenty years ago, each filled out the 401(k) forms that were provided by their HR departments. At the time, they elected for automatic contributions into their plans. They looked through the list of 401(k) investment options, selected a couple of mutual funds to auto-invest. And then they forgot about it.
It’s great that the couple had been both saving for the past-20 years. But when quizzed on what funds their 401(k) was invested in, neither could say. It had been twenty years since they chose their mutual funds. Of course, they couldn’t remember!
Jerry and Janet are typical of American households. We spend an average of 25 hours a year planning vacations that cost $5,000. Yet we’ll gladly spend less than an hour per year to plan our retirement finances. The average net worth of an American retiree is $1.2 million, according to theStreet.com.
Fantasy Football might net you $100-500 in an office pool, having spent 80 hours playing. But retirement can net you many thousands of times. Isn’t it worth spending at least 8 hours a year, if not more?
Part II: Why do people put off retirement planning?
In this next section, we explore WHY the #1 retirement mistake is made
Most Americans dread thinking about retirement. A survey by Ally Bank found that 70% of Americans think it’s even rude to mention money. In fact, according to a survey, 70% of Americans think that it’s just plain rude to talk about money.
Why people find it rude to talk about money
1. Culture: we don’t talk about money
In most world cultures, talking about money is taboo. Talking about money brings up feelings of shame, fear, judgment, and awkwardness. Think of the last time you asked for a raise. Chances are it would have felt uncomfortable. Yes? If so, you’re not alone. It’s simply the way that our culture has organized itself.
Financial planning can be an even more awkward topic to talk about. Many people are extremely uncomfortable bringing up financial issues to their spouse. Talking about budgeting can feel even worse. You’re suddenly laying out what you can and cannot afford to do. It’s not a pleasant feeling.
2. Ignorance is bliss
Humans have evolved over countless millennia to filter out unnecessary stimuli. Without that filter, our senses would be flooded with information. Every rustle through the trees would feel like a predator ready to pounce. Without a filter, we’d make for a highly ineffective species.
That evolutionary trait, however, sometimes takes itself too far. A study by researchers at the University of Waterloo found that the more urgent the issue, the more people want to remain unaware of it.
Studies at Cornell found similar tendencies of people ignoring what they didn’t know.
“Where ignorance is bliss, ’tis folly to be wise”
(AKA what you don’t know cannot hurt you)”
– Thomas Gray
Retirement often feels “dealt with” once we sign up for our employer’s retirement plan. We assume that our savings, Social Security and pensions will “come through” and “just work” when the time comes. This behavior, however, is highly consistent with the “ignorance is bliss” mentality. Even though we think that we have enough saved for retirement, few people know that they do. This is especially true for high-earning families.
Put another way, how many people know exactly how much they need for retirement? $2 Million? $5 Million? Or More? And how much of your income do you need to save to get there?
3. Lack of time
Whenever I hear people say they “don’t have time”, what they’re saying is that it’s not important to them. If something is important to us, we FIND time to deal with it. If your child gets in a major car accident, we will MAKE it to the hospital, one way or another. We could be at work, or sleeping, or out with friends. If something is important enough to us, we will find the time to do it.
But retirement planning rarely feels important. Why? Again, there’s an evolutionary reason for this. We’ve evolved a tendency to overly discount the future. Things TODAY feel much more important. Future events simply don’t have as much weight to them.
Part III: How YOU can avoid the top retirement mistake
In this final section, we cover the two key things you can do to solving the #1 retirement mistake high-earners make.
Acknowledge that you MUST plan for retirement
The first step to avoiding the #1 retirement mistake is to acknowledge the issues.
To do this, ask yourself a simple question: Are you spending enough time planning for retirement?
If the answer is “no”, then you should consider putting more time and effort into researching retirement plans. Retirement won’t “fix” itself. Even if you have automatic contributions, you need to make sure that the savings are suitably invested for your life-stage and circumstance. Even if you have plenty saved, you still want to maximize your net worth for eventual inheritances or charitable contributions.
Start PLANNING for retirement
Since retirement planning is so critical, I highly recommend you reach out to an investment pro to discuss your options. That’s because a well-qualified advisor can make sure you’re avoiding any pitfalls today when it’s still easy to correct course. Financial problems often don’t show up until much later in life. By then, they’re often far more difficult to fix.
But to get you started, here are some general guidelines on how to start planning for retirement.
1. Brainstorm a list of retirement issues
Sit down and brainstorm a list of what the life problems you face are. Problems can generally be grouped into three categories:
- How much do you need to save for retirement?
- Is your savings rate on the right track?
- How much longer do you need to work before you can retire?
- How much will healthcare cost?
- How much do you need to support your lifestyle?
- Will you need longevity insurance? Life insurance?
- Where will you retire?
- How much will you spend in your first several years of retirement?
- Do you have any special expenditures you want to make? Vehicles? House? Charity?
Each individual and family will have a different list of items to discuss. Yours might look quite different from the one above.
2. Calculate your retirement needs
Once you have brainstormed a list of your retirement questions, it’s time to answer them. Be patient here… the key is to have a good sense of what your future expenses will look like.
Most retired families will need anywhere from $100,000-$250,000 per year to cover expenses. The exact amount depends on their location, lifestyle and medical needs. So your needs might look quite different. That’s why I strongly recommend you check in with a qualified financial advisor just to be sure.
3. Stay conservative
There’s a big temptation to underestimate your retirement needs. Why worry about tomorrow when there are bills today?
But that’s the WRONG way to think about things. In fact, I tell clients that whatever you SAVE today, you’ll simply be able to spend tomorrow. It’s still your money.
And most importantly, you don’t want to run the risk of running out of money in retirement. Even if the average person lives to 78 years of age, that means half of Americans live for longer! So if you budget enough to survive to 78 years old, you still have a 50% chance of running out of money.
4. Monitor your investments
It’s more important than ever to make sure your nest egg is well-protected. That means diversifying your investments and rebalancing your portfolio if any single position becomes too large. As you reach retirement age, you need to make sure your investments also reflect your life situation. A young college graduate would have a very different portfolio than someone in their early 60’s.
5. Reach out to a financial pro
When it comes to retirement planning, it’s far easier to fix issues now than fixing them later. By then, catching up on retirement savings might prove far more difficult.
To make sure you’re on track, I’ll tell you the same thing I tell everyone else: consider reaching out to a pro financial advisor. Even a 30-minute phone call can help you identify issues and see whether you’d need to pursue additional advice.
Remember this is the top retirement mistake high earners make. It’s also one that can be solved with a bit of introspection and work. Good luck!
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