1. Starting too late:
Planning early can help you maximise the power of time. The sooner you begin to save for retirement, the more wealth you can accumulate. Although the idea is straightforward and logical, most people fail to recognise the importance of this. If you wait, the amount of money you have in retirement can be drastically reduced.
A 35-year-old starts investing $2,000 a month, at a growth rate of 7% pa. By age 65, the investor will have $2,439,941.
If they delay just 5 years, and start investing the same amount from age 40, by age 65 the investor will have $1,620,143 – an opportunity cost of $819,798!
2. Keeping all your savings in the bank:
If the inflation rate exceeds the interest rate your bank is paying you on your savings, then you are losing money each year. Currently, inflation is eroding the value of savings at the fastest pace in four decades.
As an example, if nominal interest rates were 2% and inflation was 8%, real interest rates would be minus 6%. In this scenario, $100,000 in the bank today would have halved in value in 12 years’ time.
3. Neglecting protection:
For most people, planning for retirement typically means setting aside a sum of money on a regular basis to use at a future date.
Unfortunately, things don’t always go to plan and unexpected events such as disability, serious illness, or death can prevent you from saving what you need to, or worse you might have to access your savings earlier than expected.
A basic life insurance policy can protect you from such events and ensure you and your family are financially secure not matter what happens.
4. Underestimating life expectancy:
Your life expectancy depends on several factors, most importantly your health.
In 2045, people aged 65 years in the UK can expect to live on average a further 22 years (age 87) for males and 24 years (age 89) for females.
Of course, if your health is above average then there’s a strong possibility you may live into your 90’s. When planning how much money you need in retirement this should be taken into account.
5. Underestimating the cost of living:
Everyone’s goals and aspirations in retirement are different, but with much more free time on your hands, you may need more money than you think.
Your will need an income for your whole lifetime, and even if inflation is low the cumulative effect on your expenses will be huge over a 25-year period.
6. Paying more tax than necessary:
When you reach your chosen retirement age and start to draw down an income from your investments, you may be subject to tax on this.
If you are retiring in the UK and need post tax income of GBP50,000 pa, the gross amount you need to withdraw from your investments is GBP72,600.
Structuring your investments correctly can reduce the tax due or remove this entirely.
