By Hugh F. Doherty, DDS, CFP
Picture yourself in life's second career -- retirement -- where there's no reason to rise at the crack of dawn but to tee off the golf course, and there's an abundance of traveling and hobbies. No matter how you envision retirement, getting from here to there takes serious planning.
One misstep planning for your second career could push your retirement back several years. To make sure you're in a position to retire when and how you want to, you must do diligent planning to avoid errors that could have drastic consequences:
Mistake No. 1: Not Knowing Your Numbers
There is no one formula or calculation set in stone to determine how much money you will need for retirement. Everyone's numbers are different. How much you will need depends on the lifestyle you want to lead, how much you're willing to save, and how you invest the money you set aside.
Here is a rough idea how much you will need for a retirement income.
Assume you will have an 8 percent return on your retirement plan. This will be reduced by 3 percent due to taxes and inflation, which will leave 5 percent for retirement. If someone says he or she will need an income of $50,000 per year in retirement, I reply, "You will need to accumulate $1 million."
If more is needed -- say $100,000 -- $2 million must be accumulated. Go to www.choosetosave.org and click on Ballpark E$timate for more information.
When plugging in expected investment returns, err on the side of caution. While stocks' historical returns average just over 10 percent annually, that figure is really for large-company equities and includes reinvested dividends. It doesn't account for expenses or taxes. I recommend using 8 percent. The biggest uncertainty when planning for retirement is your life expectancy. For an estimate, go to this interesting Web site, www.livingto100.com.
Also, don't assume that you'll be in a lower tax bracket during retirement. There's no way to predict what future tax rates will be, and you'll be required to take distributions after you are 70.5 years old, which could raise your tax bracket. Once you have a feel for how much you'll need to live comfortably in your golden years, you'll know exactly how much you need to put away.
Sadly, a survey of my seminar attendees revealed that many of those in the 50 to 59 age bracket have a median of $300,000 in their retirement plans. The challenge here is for them to increase their net worth to $1.5 to $2 million by age 65. The Ballpark E$timate Web site will help you determine how much you will need to step up your savings pace.
Mistake No. 2: Sending Money to the Wrong People
While some may he saving a significant portion of their income, they may not be putting it in the right places. Unfortunately, many parents who save focus more on their children's college education than on their own retirement nest eggs. This is because retirement seems far away, while college costs loom large and near. This is a very big mistake.
While making college savings a priority may seem smart, the reality is that there are a number of ways to finance an education (scholarships, student loans, work-study programs, etc.). And yes, there are families with six-figure incomes (such as doctors) who receive financial aid. What many don't realize is that they may actually be hurting their children's chances of receiving financial aid by stockpiling savings outside of a retirement account.
Another big mistake is to put "extra" money toward paring down mortgage debt instead of building nest eggs. You won't get rich paying down debt. It's smart to whittle away at nonproductive debt such as credit card balances, but it's not smart to obsess about reducing a hefty mortgage that brings tax benefits with it.
Next: Mistake No. 3: Not striking the right balance >
