Wednesday, 16 December 2015

Retirement planning mistakes

Motto: “You must learn from the mistakes of others. You can’t possibly live long enough to make them all yourself.” (Sam Levenson)

As i firmly believe that is easier to learn from other's mistakes than to learn it the hard way, by doing them, i want to say something, based on what i just read today. I will make a list of the most common mistakes i found (and i do not want to make).

1. No plan
According to the Retirement Confidence Survey from the Employee Benefits Research Institute, 48% of workers haven’t calculated how much money they need to save for retirement. What? If you are in this category, here is a link to a one-minute plan. Use it! No, really, i mean it, use it! Similarly, Harvard Business School published a study on goal setting and found:
- 83% don’t have clearly defined goals
- 14% have goals but they aren’t written down
- Only 3% have goals committed in writing. After a 30 year follow up, the conclusion was the 3% with written goals earned an astounding 10 times the amount of the 83% group. Shall i say more?

2. Not saving enough
Here’s a shocking set of statistics for you:
- According to the Federal Reserve, the median balance of retirement savings for Americans is $60,000.
- The median retirement savings balance for those aged 35-44 is $42,700.
- The median retirement savings balance in the 55-64 age category (people near retirement) is $103,000.
In a PBS interview, Jack Vanderhei of the Employee Benefit Research Institute said you need to save 13.3% of your total income if you’re a male who works for 30 years, retires at 65, and only relies on Social Security and his retirement plan. A female needs to save 14.1% – employer and employee contribution combined – because of longer life expectancy. If you want to retire 5 years earlier at age 60, then contribution rates rise to 14.5% and 15.3% respectively. Vanderhei isn’t a lone wolf in these seemingly aggressive calculations. Brooks Hamilton calculates retirement savings contribution rates between 15% and 18% of earned income depending on assumptions. This is greatly in excess of average savings rates for most employees. And if that weren’t enough to shock you, Jack Bogle of Vanguard Mutual Funds fame points out people who don’t start saving until age 40 should contribute 25% of their income to retirement savings because they need to make up for lost time. Of course, there are some who save more than 50% of what they earn (What? And no, they are not millionaires, but average people on average wages, the word stoic say something to you? Frugal? Not spending on silly things?)

3. Not starting to save early enough
The most valuable asset you have when saving for retirement is time. Not yet, it is not the right time, you will say. The reality is there will never be a “right” or convenient time to start building toward a secure retirement. It will never be easier than today. It will only get harder because there’s less time. Do not delay it.

4. Not maximizing tax deferral
 Or as John Maynard Keynes said: “The avoidance of taxes is the only intellectual pursuit that carries any reward.” It is good, it is free, result in extra money towards your retirement plan. Why not use it?

5. Spending too much or too little.
Again with a quote: “We have some control over when we retire. However, we have very little control over how long we live.” (Gordon Smith) Make no sense to spend more than we can possible earn, Also, make no sense to become saving hunters, even if "challenge everything" is a good habit when we talk about money, we need not to live a miserable unfulfilled life. See this post about money allocation for an example. And remember, you can play with the percentages.

6. Investing too aggressively or not aggressive enough.
Controlled risks, that's the word. Set a percentage of your money that you are comfortable to lose and experiment with it. Mine is somewhere between 5% and 10%. Use that money for investments that will have 100%-1000% profit. If is good you will have a lot of money, if not, you afford to lose it. But if only 1 out of 5 of this experiments succeeds, you get more money than all 5 sums invested traditionally. That's the idea. If you invest too much you can lose a significant amount, but if you do not risk at all, you will not have enough return on investments to do it faster.

7. Paying too much investment expenses.
Really, you need too research a bit, the internet is free. Do not believe your bank just because they said they will do it for you. Look around for better offers. Learn about compounding. See if you can teach yourself to do it. Premium rates are often not justified in a financial world.In the end, when we talk about shares, everyone is guessing. So why to pay somebody else to guess for you? Educate yourself, is much more rewarding. And doable.

Good luck and a good week!

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