5 Things That Can Ruin Your Retirement Plans
If you ask anyone hunched over their laptops or stuck in soul crippling traffic to and from work, they will likely tell you their dream is to retire early. For most people early retirement may seem out of reach, but there are certain things you can do to help make your dream a reality. Most importantly, having a strategy in place is the foundation of smart retirement planning. Stick to your plans and don’t get distracted by the next shiny bright object and ruin your retirement plans.
There are a few mistakes that people commonly make that can easily ruin your hard work and the opportunity for you to retire comfortably. We need to be wary of these mistakes and not let them derail our early retirement dreams!
Lack of Detailed Planning
Unfortunately, not having a good detailed plan is one common reason that people have trouble reaching their financial goals. Not knowing where you stand financially will make it difficult to estimate how much you are currently saving, how much more you can save, and how much money you will need in the future. Building a detailed monthly budget and personal balance sheet should always be the first step in the process of smart financial planning.
I know many people who have a general idea of how much they have, but don’t have a clue as to how much they will need get to where they wish to be. Having a detailed plan will allow you to assess your current financial situation and help you determine the best course of action to take so you can reach your goals.
Living Beyond Your Means
I have read many articles about retirement planning, and one of the key principles that is often cited as the most important aspect of retirement planning is to live below your means. What does this mean? This means the majority of your income is saved instead of spent. Unfortunately, this is difficult for some people. You simply need to spend a lot less than what you bring in each month! You should never buy things that you can’t afford.
Distressingly, it’s pretty easy nowadays for people to overreach. Credit card companies sometimes offer amazing interest rates for some period of time to lure people into spending more than they should. Don’t do it! Pretty soon, you will get accustomed to leaving unpaid balances on your credit card. Always pay your credit card bills in full every month.
Also, and I know this may sound a bit too extreme, don’t buy a car unless you can pay for it in full with cash. Stay away from leasing a car. The worst thing for your retirement plans is getting into the vicious cycle of living paycheck to paycheck. Avoid lifestyle inflation and tell yourself you don’t need to keep up with your friends or neighbors. You can’t save anything if there’s nothing left to save. Review your plans monthly and constantly remind yourself of your long term financial goals.
Always Making Exceptions to the Rule
Even if you have a plan, it takes tremendous discipline to stick with it. I will admit that this won’t be easy. For one reason or another, there will always be extraordinary situation that comes up whereby you feel like you need to make an exception.
You can have a monthly budget but an amazing deal comes along for a new TV that you’ve been eyeing for a long time. Or you come across a super deal to prepay a 2-year gym membership even though you are not sure how often you will go.
Great deals are hard to pass up, especially if it’s a limited time offer or if it’s something you were going to buy anyway in the future. Having said that, if you make too many exceptions, then it becomes the rule. Making impulse buys or spending money on things that you may not need will set you back financially. Stick to the plan!
Making Optimistic Assumptions
I have always stressed the importance of forecasting how much your assets will grow every year. There should be both short- and long-term goals. If you own any stocks, mutual funds or real estate, making overly optimistic assumptions on future returns may prove to be a big mistake.
The stock market and real estate prices are both volatile — they don’t always go up. We see this repeatedly throughout history. For example, back in August 2000 the S&P 500 reached over 1,500 and subsequently dropped to below 900 by September 2002.
After that, the stock market rallied for a number of years until topping 1,500 again in June 2007. Then, as we all know, the financial crisis that followed was brutal, sending the S&P 500 down below 800 by February 2009. That is a decline of over 46% from the high in June 2007! From that low point in 2009, the stock market has been in a rally mode almost non-stop.
So as history has shown us, when things go bad it can get ugly for a long period of time before it recovers. While many professionals make forecasts and predictions on the direction of the stock market, nobody really knows how the stock market will do in the future.
Don’t assume that future returns will still be good just because the market has done well in the past few years. Remember, every assumption you make in your calculations will determine how much you think you need to retire. I have heard too many stories of couples who were about to retire after 2008, but suddenly realize that they need to work for another 5 or 10 years.
Stuffing Money Underneath the Mattress
A common mistake I see often is that many people keep too much money sitting in their checking and saving accounts. We should be constantly trying to improve the performance of our assets and grow our net worth. Let your money work for you! I recommend keeping six months of living expenses as an emergency fund in the bank.
You need to strategically take calculated risks and invest what you can. It’s remarkably difficult to save $1 million dollars if you don’t invest in assets like stocks or real estate. Take the time to understand your investment options and the risks involved. Use the concept of compounding returns to your advantage by investing as much as you can and as early as you can. Making smart investment decisions allow many people with average incomes the ability to retire wealthy.