5 Common Mistakes of Retirement Planning

Not saving enough during your work life is undoubtedly a big mistake. You savings always come handy, more so when your steady income stops during retirement. Retirement planning is a long-term investment, hence it is imperative to plan it right.

Here are some pointers to help you avoid the five most common mistakes people make when planning their retirement:

1. Assuming you can retire when you want

Most people think they can choose to retire when they want. Interestingly, stats reveal a different story. According to Katie Libbe, head of consumer insights at Allianz Life, one in five people retire earlier than planned. The reasons could be job loss, illness, among many other unforeseeable factors.

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2. Underestimating longevity

Life expectancy is increasing across the globe. For example, in US, men live up to an average age of 81 years, whereas women are expected to live up to an average age of 84 years. Many people, however, will make it up to 95 years. How does one expect savings and retirement funds to continue for more than 20 years after the average retirement age of 66? Considering such factors in your retirement plan is the answer.

3. Ignoring the savings drawdown

Some people are forced to start taking out from their savings early on in life for various reasons, hence ending up outliving their money. Making provisions for such drawdowns in the retirement plan ensures adequate returns during retirement. Experts believe limiting the annual drawdown rate from savings to 4% of the total assets is an effective way to ensure your savings outlive you.

4. Overlooking the impact of tax on y our plans

During retirement, if your income isn’t tax-effective, you are missing out somewhere. Hence it is beneficial to have a mix of several types of accounts. You need a combination of your fully taxable accounts to work alongside your tax-deferred and tax-free accounts in order to have flexibility when drawing down assets. You should also avoid taking early distributions.

5. Failing to lock up lifetime income

In absence of guaranteed pension, the biggest challenge for retirees is converting their savings into a continuing stream of income to cover for fixed expenses during retirement years. Investing in annuities is a good way to lock up that lifetime income for a big payout when most needed.