There are so many mistakes made when it comes to planning for retirement that is hard to know where to begin. We all read the depressing headlines about how the average person has nowhere near enough money saved for retirement. The numbers go like this:
Average amount saved for people in their 40s: $63,000
Average amount saved for people in their 50s: $117,000
The Other Mistakes
I don't want to dwell on the topic of how much should be saved. That has been discussed to death and we know that many of the people who aren't saving enough money will be working into their 70s.
Instead, I want to focus on people who have saved a reasonable amount for retirement, but make other mistakes that could cause them problems down the road.
Mistake 1: Not having enough income in retirement to cover expenses
I have written before about how companies like Exxon (NYSE:XOM) can help you generate the income you need to cover expenses in retirement. The days of keeping a big chunk of money in treasuries are pretty much over for most people. Interest rates are just too low to generate the income that many of us need.
As we have recommended time and again, the best way to generate income in today's world is to buy solid dividend-growth stocks that have a long history of increasing their dividends. We consistently recommend companies such as Exxon, Johnson & Johnson (NYSE:JNJ), Procter & Gamble (NYSE:PG), and Altria (NYSE:MO). These are the types of companies that can generate the income you need in retirement such that you never have to dip into your investment balances.
Mistake 2: Buying Annuities
Oh, the lure of those "guaranteed" annuities. But if it sounds too good to be true, it most definitely is. As laid out here, annuities usually have extremely high fees (usually hidden too), have limited investment choices, and complex surrender rules. The vast majority of annuities are not the great investment they are claimed to be.
Mistake 3: Not Knowing When You Can Retire Comfortably
So many people are just guessing as to when they can retire so they do not outlive their money. With a question this important, it is beyond prudent to use the right planning tools. Whether it's calculating which type of pension to choose or running a comprehensive retirement plan, you should be able to find good tools online these days.
We do all of our analysis in our publicly available WealthTrace Planner. The one thing we consistently find is that many people do not have the income they need in order to retire stress-free. That is either due to having too much money in fixed income or not enough money in great dividend paying stocks.
Mistake 4: Assuming A Short Life Expectancy
This is a topic that is not discussed enough in my opinion. Estimating how long you will live can have a big impact on when you should retire and/or how much you need to save.
Many people assume a life expectancy between 75 and 85. But today a 65-year-old man has a one-in-four chance of living to age 92. Married couples that are 65 have a one-in-four chance of at least one spouse surviving to age 97. A 25% chance is way too large to ignore. That is why it is best to be prudent and assume a long life of retirement.
Don't Bury Your Head In The Sand
Many people don't want to know the truth about their retirement so they do nothing. They have no idea when their money will run out. Don't be one of them. It is so important to know if or when your money will run out. Only then can you begin planning for the future.
Disclosure: I am/we are long XOM, JNJ, PG, MO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.