Retirement Dos and Don’ts: 6 Important Planning Tips for the Future
Retirement planning was as difficult as ever in 2022. The S&P 500 was down more than 23 percent by October, since the start of the year and inflation was at 8.3 percent in August. For comparison, the annual inflation rate before the pandemic was 1.4 percent. It has become harder to make do in the present, let alone save for the future.
That isn’t to say that planning and saving for retirement needs to take a back seat. The market has bounced back from the Great Depression and Great Recession as well as two World Wars and the dot-com bust, among other setbacks. Over time, there are new inventions and technologies, and economic growth, so the markets do rise over longer periods of time.
“You can’t plan with certainty,” notes financial advisor and radio host Ric Edelman concerning retirement planning in 2022. “It’s unrealistic to think you can build a strategy right now for the next 30 years. Instead, build a strategy just to get you through this period of uncertainty.”
This might mean making small changes such as cutting back on your gas or grocery bills or not taking a family vacation. If possible, continue to invest in mutual funds under the assumption that the market will rebound, at which point you’ll get a greater return on your investment.
The following are three more things you should do—and three things you definitely shouldn’t—as you evaluate your retirement plan.
Do – Prepare for Unplanned Retirement
Poet Robert Burns once wrote, “The best-laid schemes o’ mice an’ men/Gang aft a-gley,” which has since been adapted as “The best-laid plans of mice and men often go awry.” This is especially true for retirement planning. Regardless of how much time and effort you put into planning for the future, things won’t always go as you envisioned. In 2019 the Employee Benefit Research Institute conducted a survey that found almost half of the retirees concluded their careers before their target retirement age. The pandemic has only accelerated this trendDo
This means workers in their 50s and 60s should already have contingency retirement plans with specific actions that can be taken to accommodate a relatively comfortable lifestyle. If you have to retire a few years earlier than anticipated with a savings shortfall of tens of thousands of dollars, consider adjusting your investment portfolio or downsizing your home.
Do – Monitor Investments and Plan for Inflation
The past few years have proven how much inflation can affect personal finance, so it’s essential to consider inflation when investing and saving for retirement. Assuming an average inflation rate of 1.5 percent, your current $250,000 in retirement savings would only have a purchasing power of $172,301 25 years from now. Higher rates of inflation obviously make that loss of purchasing power a problem a lot sooner.
Putting money into relatively safe investment vehicles like mutual funds and guaranteed investment contracts can help mitigate the impact of inflation, but don’t let your investments sit idle. Work with an investment advisor and regularly check the performance of your funds, making annual adjustments as necessary. Ask your advisor to include some inflation hedge investments as well.
Do – Pay Down Debt ASAP
According to Forbes, the percentage of people in their 60s and 70s with mortgages as well as student loan and credit card debt is rising. Paying these debts off on a fixed income can be challenging and eats away at your retirement savings. Make sure to pay off all debts, or as much as possible, before retiring, unless the interest rate on your debt is very low.
Don’t – Count on Inheritances
Counting on others is generally poor advice, especially as it relates to retirement planning. While some people are fortunate enough to receive large, life-changing inheritances, those cases are few and far between. Even if your parents or grandparents are well off financially, there’s no guarantee that you’ll receive a significant inheritance. They may not even have an estate plan, or they may have other ideas about how to pass on their wealth. Although uncomfortable, make it a point to talk to your parents about their and your expectations.
Don’t – Ignore Healthcare Costs
Healthcare is another important retirement cost to consider. You can take several steps, including eating healthy and exercising regularly, to potentially lessen the amount of money you might spend on health care in retirement. However, health is unpredictable and it’s vital to be prepared for anything. As of 2022, the average retired couple age 65 would need $315,000 saved for healthcare expenses, according to the Fidelity Retiree Health Care Cost Estimate.
If offered by an employer, enroll in a health savings account. These accounts sometimes collect employer contributions and can be withdrawn from tax-free (state and federal) for qualified medical expenses.
Don’t – Cash Out 401(k)s between Jobs
Investing in an employer-sponsored 401(k) account is one of the easiest and most efficient ways to grow your money for retirement. A designated amount of money comes out of your paycheck, which is sometimes matched by the employer, and is put into an investment account. You can collect this money when you switch jobs, but it’ll pay off long-term to roll the account over instead.
Fidelity Investments notes that the average cash-out figure for workers under 40 who switch jobs is $14,300. When you cash out before age 59 1/2, you can lose up to 20 percent of the funds to cover taxes and be hit with an additional 10 percent early withdrawal penalty.