Retirement Planning: The 1 Mistake Most People Are Making That Could Leave Them Broke
Planning for retirement means making wise savings and investment choices so you’ll have enough money to sustain yourself comfortably after you leave the workforce. The ultimate goal is to create a nest egg substantial enough to provide financial security for the rest of your life. But therein lies the problem — how long will that likely be?
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Underestimating the length of your retirement can leave you struggling to make ends meet in your later years. Keep reading to learn more information about this critical error, what you can do today to avoid it and how to prepare for a worry-free, sustainable retirement.
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Understanding the Mistake
The fundamental goal of saving for retirement is to secure an income stream you can rely on from the moment you stop working until, well, the end of your life. But accurately guessing how long you’ll need your savings to last can be a lot more difficult than you may at first think.
What’s more, CNBC conducted a survey in August 2024 that revealed a lot of people aren’t planning for a lengthy retirement. Only 64% of people planning for retirement say they think they’ll need to save for 20 years or less, while only 16% are preparing for a retirement of over 30 years.
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The Risks of Miscalculation
There’s some serious risk in underestimating the length of time you’ll be around after you stop working. One major pitfall is assuming you’ll be able to work until you decide to retire. While this may have once been the case, present-day reality suggests it may not be that simple.
Older workers have to face the fact that their employers may choose to replace them with younger, more affordable workers. There are also the realities of aging to contend with. As we get older, unexpected health issues can necessitate early retirement, which can seriously complicate financial plans made with a longer working life in mind.
If there’s a silver lining, it may be that medical advances and improvements in senior healthcare can dramatically extend your life expectancy. The downside here is that this makes it nearly impossible to rely on statistical averages.
In the worst-case scenario, you’ll run out of funds at some point during your retirement, which means dealing with drastic and uncomfortable lifestyle changes, going into debt or even struggling to afford the essential medical care you may need.
A Better Approach
A good way to increase the odds that your retirement savings will last as long as you do is to plan for a longer lifespan. Instead of aiming for an average life expectancy of 77.5 years, plan on living to be 100. Though you’ll have to save more in the meantime, it’s better to have it and not need it than to need it and not have it.
You’ll also want to take a strategic approach to withdrawing from your retirement savings. Instead of withdrawing an arbitrary amount every year during retirement, consider inflation and how your investments may have performed during the prior year. Then use that information to adjust the amount you withdraw every year.
Adopting a more flexible and responsive approach to managing your retirement funds is also a good idea. In years with market downturns or underperforming investments, withdraw less than you ordinarily would to avoid depleting your portfolio, which could have a significant impact on your ability to recoup losses in subsequent years.
As with any investment, diversification is key. Make a plan for retirement income that can supplement savings and Social Security benefits. While this can be part-time work, receiving rental income from investment properties or investing in stocks that pay dividends and annuities will leave you with more time to enjoy your golden years.
Whatever your approach, consider every outcome carefully and take the necessary steps to protect your peace of mind so you can enjoy the freedom of retirement without having to worry about how you’ll cover essential expenses.
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This article originally appeared on GOBankingRates.com: Retirement Planning: The 1 Mistake Most People Are Making That Could Leave Them Broke