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Feathering the Nest: retirement savings mistakes you must avoid

Saving is good. It’s always good. Saving for your retirement is more than good, it’s imperative. With lifespans moving into the nineties and beyond, it’s vital that you plan your retirement carefully, investigate the best options, get as much advice as you can, and understand that retirement savings are not just savings, but the most important plan of your life; retirement savings are how you are going to live in your golden years, how you are going to look after yourself when your working life comes to an end. So it’s important to plan early, contribute regularly, and not make any mistakes.

Well, that sounds good. But oddly enough, people make more mistakes around their retirement planning than almost anything else. There are many slips you might make that lose you time and money along the way. Let’s have a look at what not to do when saving for your old age…

Focusing more on the present rather than the future

The younger we are, the more we tend to focus on the here and now. But conversely, this is exactly the time when we should start to seriously consider retirement planning. The earlier you start the better it will be as you get older. However, we are wired biologically to attend to life moment by moment – and events that are closer in time will get more attention than those further away. There are many aspects we consider more pressing, such as a house, a car, educational goals and family security. When we think like this, then we lose the value of time and the astonishing power of compound interest.

Leaving your money in a savings account

If you have some money saved, it’s important to decide fairly early on what you intend to do with it. If it’s for a specific objective, that’s fine. But if you are just practising saving without taking the steps to actually invest, you are losing an enormous amount of value. The small interest rate you may garner is no match for the returns of regular contributions to an investment. And remember that interest on an ordinary savings account is taxable, whereas a canny investment portfolio can be tax-free. Historically, stocks and shares have  outperformed savings over the long-term.

Cashing out your Retirement Savings when changing jobs

This is a biggie. How many people preserve their retirement savings when they move from one job to another? The temptation to spend the money on a holiday or new car or pay off debts, is considerable, but it means you lose all that time vested in compound interest growth in a matter of months. And time lost is money lost – not to mention that you will be taxed on your withdrawal. So, this common mistake must be resisted at all costs. Keep your pension in a preservation fund until you can move it to another company fund or invest it wisely. Never spend it.

Not saving enough

How much is enough? Depends on who you talk to, but you should be putting 40% of your income away in retirement savings as soon as you can. This would exclude any pension contributions your company organises for you. This amount of 40 % should be after deductions. If you can train yourself to live on 60% of your salary for at least the first ten years of your working life, you will be well on the way to building sound money for the future. Unfortunately, not many people can do this – or even consider doing this. People think 10% is enough, or even 20%, but no, it’s 40%. Rising costs and longer lifespans are eating away at your savings every day. You need to conserve as much as you can right from the beginning. Downsize, cut costs, do whatever it takes – if you’re willing to make sacrifices now, you won’t have to spend your golden years struggling to survive.

 Saving Without a Plan

Most people have no idea of how much they will need for their retirement. Increasing  longevity, retirement age, where you will live, living arrangements, taxes, medical care, etc, are just some of the factors that must be considered. The kind of lifestyle you would like to enjoy would form a major part of the plan. Likewise whether you are planning to work or not. These are complex issues and the overall plan should be designed to incorporate these factors so you are prepared for not only what you would like to happen, but also for the unexpected.

 Failing to plan for healthcare costs

The older you get, the more healthcare will bite into your savings. Life expectancy is increasing every decade, but while we are living longer, we aren’t living younger – and failing health also becomes a greater issue each decade we age. A health plan should be part of any retirement planning. We all reach the cross X in life – the moment when your income decreases and your health issues increase. Apart from a good medical aid, you should also invest in a separate dedicated health savings account which will be there to backup any shortfalls on medical aid refunds. Try not to use these savings until you reach retirement age. A good retirement planner will help you assess how much you should be putting away in this fund to ensure enough to see you through inflation and the rising costs of medical care.  

Relying on a Spouse

Relying on someone else to prepare your retirement is a gamble. In today’s world, change is cheap – and often marriages don’t last. And if you have left retirement savings to a joint arrangement and have not actually built your own portfolio, then you are making a dangerous mistake. Increasingly, people are getting divorced later in life. This means you may find yourself having to make arrangements for your old age when you are already past middle-age, and you will have lost years of potential saving time. The second risky assumption is that your spouse will know how to adequately analyse the costs of retirement for two aging people. What if poor investment choices have been made, or the money simply isn’t enough? If you are past working age when these facts emerge, you would find yourself in a very difficult financial position. Make sure from day one that you have your own retirement savings plan, and insist that you both work with a good financial planner – as a couple, and as individuals.

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