Tallying your living expenses isn’t all you’ll need to do when deciding whether you can afford to retire. A crucial factor in advance planning is to envision the future—particularly the costs surrounding aging—as well as home repairs and other bills that are difficult to predict. Only thinking about living expenses without seeing the broader picture is one of the top retirement planning mistakes.
Another category, unexpected expenses—including out-of-pocket health care costs—are essential to include in the picture. Too often, though, people nearing retirement make the mistake of combining these into a misleading bottom line—an account total that combines living expenses and a reserve for emergencies and medical and long-term care expenses.
These have to be separate because once you tap an account to pay for emergencies or medical care, you still will have living expenses.
Here's a look at how retirees and workers nearing retirement can develop better plans to address both regular cash-flow requirements and reserves for emergencies. We will also look at how not to jeopardize it all in common retirement scams, and how to spot them.
How to Develop the Right Retirement Plan
Avoid a top mistake of relying on an emergency fund to also pay for expenses. Be sure to plan properly for retirement by taking these steps:
Solidify the First Part of the Plan: Expenses
Your living expenses should include the cost of food; your home; mortgages for second properties or vacation homes; health and long-term care insurance; utilities; transportation costs including car maintenance and replacement; debt including credit card loans; travel and entertainment.
You can use a retirement savings calculator to help determine if you are saving enough for retirement in general. This should be an easy way to add up account balances, including employee retirement plans such as your IRAs, pension, 401k and 403b.
You can include what you plan to contribute annually into those accounts, and your estimated future Social Security income.
Set Up a Fund to Cover Health Costs
Health care, including medications not covered by insurance or Medicare, is one of the largest expenses in retirement. The average couple will need about $363,946 for medical premiums and out-of-pocket costs in retirement.
Medicare will not cover all your health care costs in retirement. An estimated 15% of the average retiree's annual expenses will be used for health care-related expenses such as Medicare premiums and out-of-pocket payments.
If you haven’t yet retired, you can help cover these costs by enrolling in a health savings account plan through your workplace. This will allow you to save pre-tax dollars which can be withdrawn tax-free for eligible medical expenses. Your employer may contribute to this account as well.
To prepare for potential medical emergencies or a serious illness, consider contributing to a Roth IRA, because it allows you to withdraw sums that you’ve invested for medical expenses, free of penalties. If you tap into earnings on your contributions, however, penalties will kick in. You can open a Roth IRA with no minimum amount required.
Have a Contingency Fund
The widely recommended amount to have in an emergency fund is three to six months' worth of living expenses. You may want to increase that to a year or 18 months' worth in retirement, for issues such as major unexpected home repairs. This is akin to an insurance policy and it should take a back seat to more pressing financial goals such as paying off high-interest loans.
Recruit an Experienced Financial Advisor
Enlist the help of a certified, trusted financial advisor to help you come up with a sound retirement plan. In addition to optimizing an investment portfolio, including adjusting it as your life changes, they can counsel you on how to get the most out of Social Security.
In addition to traditional financial planners, robo advisors offer the latest option for people who don’t want to spend time or fees for recruiting a financial advisor, yet they also don’t want to take the DIY approach.
Robo advisors, including Fifth Third Bank’s OptiFi, are automated, algorithm-dependent services that eliminate the human element (and expense) from the investment equation, although some offer assistance from a human, too.
How to Spot Retirement Scams
Some scams can be easy to recognize. Knowing a few essential ways to sidestep fraudsters can protect your retirement plans.
Ask the Right Questions
Don’t rely on information or references from a sales pitch, which could be fraudulent. You should be clear on how the investment works, how risky it is, and know the background history of the company.
Talk to friends and family before investing, too. Let the buyer beware—unbelievably good deals should not be believed.
Do Your Research
Do not trust unsolicited emails, postings and company news releases as the only basis for your investment decisions. The U.S. Securities and Exchange Commission offers fast, free and easy-to-use resources for determining the integrity of companies, brokers and salespeople—you should check their reputations, even those you already know them.
Be Skeptical of Fear Tactics
Scammers prey on retirees worried about their savings, especially people facing daunting medical expenses, so they tout schemes with claims of boosting financial security and erasing fears.
Don’t Give In to High-Pressure Pitches
Consider “once-in-a-lifetime” opportunities or “inside” information to be red flags. Scammers want you to act fast before you find out the facts.
Raise questions if anyone stalls you if you ask for your principal or profits or why you can’t access your money.
You should complain if you suspect fraud or a questionable practice and you do not get not adequate explanations. The SEC advises that you should not let embarrassment or concerns about being deemed incapable of handling your own affairs prevent you from filing a complaint with the SEC, the Financial Industry Regulatory Authority, or your state regulator.
The factors that influence retirement planning are changing, from healthcare costs to longer lifespans. People are waiting longer to retire and receive benefits. For some it’s a financial strategy and others prefer to work longer, whether it is continuing in their career or finding new, part-time endeavors.
In any case, understanding how to financially plan for retirement, avoid a top planning mistake and sidestep scams can ease your mind when it comes to saving money and enjoying retirement.