By Jeremy Wallace and Andrew Hart
In the midst of day-to-day busyness, retirement often feels like a distant dream. But don’t keep pushing off thinking about your retirement—the financial actions you take during your pre-retirement years can either set you up for success or for failure. Don’t let the latter happen! Use these crucial years before saying goodbye to your career to set a solid foundation for your much-anticipated golden years, and be sure to avoid these common mistakes.
Not Saving Early Enough
There’s a reason you hear a lot about compound interest—it’s powerful! As you build your savings, the interest you gain earns more interest the longer the money sits there. Therefore, the earlier you start saving, the longer time horizon you have for your savings to compound. A common mistake that pre-retirees make is starting their savings journey much later than they should have. Even if it is just small amounts of money saved early on, the compounding effect will be worth it in the long run.
For example, if you start saving $400 per month at age 25, you would have $1 million saved by age 65 (assuming a 7% annual investment return). If you don’t start until age 35, you’ll have to save around twice as much to reach $1 million by age 65.
Using Retirement Funds to Pay for College
This is a common mistake that pre-retirees make early on, thinking that they will be able to make up for the money taken out of their retirement accounts to pay for their children’s college costs. While it is a great goal to want to pay for your children’s college education, you have to weigh the consequences of what it could do to your retirement.
If you deplete a good chunk of your retirement funds early on, you are just setting yourself up for a different type of financial strain that cannot be financed. Remember, you can always borrow for college, but you can’t borrow for retirement. If you still want to help your kids out, walk them through the process of applying for scholarships, grants, or financial aid, and encourage them to find a part-time job while they are studying.
Investing Too Aggressively at Or Near the Point of Retirement
Unless you’re planning to work part-time, you don’t earn a paycheck in retirement. Since you have to rely on the investments and savings you’ve accumulated during your working years, the last thing you want is the markets hurting your chances of a comfortable retirement.
When you first start out accumulating your wealth, you have a long-time horizon, and most investors have the ability to be more aggressive when beginning to save for retirement. However, as you get closer to retirement, you want to adjust your investment allocations to be less aggressive. Nobody knows what the market is going to do, but we do know that as retirement approaches, you cannot afford a downturn in the market.
Not Having A Plan for Your Retirement Lifestyle
So much of retirement planning is based on numbers. Will you have enough money? How will the market affect my investments? But have you thought about what you want your life to look like once you cross that career finish line?
Free time is a major perk of retirement, but when you go from working full-time to not working at all, it can be a shock to your system. Saying goodbye to your career, your colleagues, and your routines can cause anxiety and depression. But if you plan ahead to fill your time with activities that will fulfill you, you can avoid the negative emotions that can come with this life transition.
Do you want to know what activities result in a fulfilling retirement? A BMO study on retirement planning reveals that retirees who stayed busy and active, pursued independence, and volunteered their time were satisfied with their life. (1) One study of retirees even found that those who volunteered 200 hours a year were less likely to develop high blood pressure. (2) The takeaway here is to be intentional about your time in retirement. Make a list of things you want to do, places you want to go, and people you want to spend time with, and then strategically map out the details so your goals become a reality. It’s easy to lose your identity when you say goodbye to your career, but filling your time and venturing out into new territory will help you build a new identity and give you something to look forward to.
The First Step to Avoiding Mistakes
Planning for retirement is not always a simple process. It involves a lot of decisions to be made today that can drastically impact your future self in retirement. If you’d like to learn more about how you can get on track for your retirement, we at Wallace Hart Capital Management would love to help you out. Get started today!
Jeremy Wallace is founder and chief investment officer at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Jeremy has 20 years of experience in the financial industry and is passionate about helping clients preserve and enhance their wealth so they can pursue their passions. Jeremy graduated from Emory University with a degree in international economics and a certificate in financial planning. Outside of the office, Jeremy spends most of his free time with his wife, Julie, and their three children, Isabel, Lincoln, and Reid. He is an avid Chicago Cubs baseball fan, and he enjoys golfing with his wife and traveling with his family. Learn more about Jeremy by connecting with him on LinkedIn.
Andrew Hart is the co-founder and chief planning strategist at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Andrew has 15 years of experience in the financial industry and strives to provide new and better strategies and processes to improve his clients’ lives. Andrew graduated from Wittenberg University with a bachelor’s degree in business management and holds a certificate in financial planning from Georgetown University and the CERTIFIED FINANCIAL PLANNER™ designation. When he’s not working, you can find him enjoying the city of Lexington, KY and spending time with his wife, Susan, twin sons, George and Ted, and daughters, Merritt and Philippa. To learn more about Andrew, connect with him on LinkedIn.