The following is a guest post from Wayne at Young Family Finance. He writes to help young families with financial challenges, like choosing between daycare and stay at home parenting.
The very fact that you are reading this post suggests that you are ahead of the game. Most individuals or families fail to do any adequate planning for retirement. Unless you are being forced to read this, you are probably thinking about your own retirement.
Insufficient retirement planning is evident not only in the lack of savings of individuals approaching retirement age, but also in the lack of knowledge about fundamentals of finances like a Roth IRA or paying your bills on time. While I could detail my family’s retirement plan for you (yes, I do have one even though I am in my 20’s), sometimes it is better to learn from other people’s mistakes. Instead of offering you advice on what you SHOULD do to prepare, I think it will perform a better service to show you what you should NOT be doing.
Horrible Retirement Plans
1. Procrastination: Procrastinating is not just something that college students do. In fact, history shows that most people fail to start saving for their retirement at a young age. If retirement is 40 years away, why would someone need to start saving now, right? Well, that is the mentality that contributes to this horrible method of retirement planning at least. What young people fail to understand is that with compound interest, someone who starts saving $4,800 per year at age 20 as opposed to starting at age 30, (assuming an 8% annual return) will have over $800,000 more when they retire at age 60. If you are putting off your savings for retirement, you are giving up a lot of money.
2. Life Insurance: Prolonging your retirement planning is all too common of a mistake. Have you ever heard of someone waiting for their parents to die so they can receive an inheritance. While you would think that this is only in really wealthy families or Hollywood, this isn’t the case. Fighting among siblings for an inheritance seems to be increasingly popular in the middle class. Believe it or not, some children are hoping their parents don’t live too long so that they can supplement their retirement income with this money. Before you are too quick to judge, think of how much extra financial security you would have if your parents passed away and left you with a pretty penny. If this is your plan for retirement, you might want to consider two things: 1) many people are outliving their savings so you shouldn’t depend on this money and 2) this takes the responsibility away from you. Retirement planning is not intended to find the easiest way out, but is about discipline and delayed gratification.
3. Government Aid: Similar to number 2, many families are banking (pun intended) on social security. While I believe social security will be around for a long time and isn’t going anywhere anytime soon, this should not be mistaken for a proper retirement plan. Depending on this as your only income in retirement will force you to either live with your children or return to the workforce in order to cover all of your bills. Instead of depending entirely on social security, why not use it as a supplemental income or even better, a safety net? I guarantee that you won’t regret being over-prepared for retirement.
Hopefully you are not following any of these approaches as you prepare for your retirement. Following these plans will not lead to success. It will most likely result in financial disaster. Instead, take action now and be more aggressive in your retirement savings.
What are some bad models of retirement that you have seen?
photo credit: flickr – striatic