Managing your finances can be tricky and has endless advice on how best to manage your money – especially when it comes to investing and preparing for retirement.
While many of these are good tips, some may direct your retirement in the wrong direction. These three duties may seem harmless, but ultimately they can throw away your entire retirement plan.
. Safe investments are ideal
Everyone wants to protect their money, so it makes sense to want to get your money in the safest possible investments. Especially if you were burned during the Great Recession, you might think it best to avoid the stock market to prevent another big loss.
But so-called "safe" investments may in fact be more risky in the long run than investing in shares. market. Less risk usually leads to less remuneration, and lower-risk investments, such as CDs and money market funds, typically return only around 2% to 3% per year. And even the best savings accounts have interest rates of only 2%. With inflation, which hovers around 2% to 3% per year, it means that your savings can not even grow enough to cope with the rising cost of living. In other words, your money may lose its worth as long as you sit in these "safe" accounts.
The stock market, despite its ups and downs, usually offers much higher returns in the long run. The key is to invest in low-cost index and mutual funds, which are generally safer alternatives to investing in individual shares. These types of funds distribute their money in tens or even hundreds of different stocks, limiting risk while still earning average returns – about 7% to 10% per year.
This does not mean you should not have any lower-risk investments. A strong, diversified portfolio has many different types of investments that create a healthy balance. But if you put the bulk of your money for low-risk investments, you probably will not see the return you need to reach your retirement goals.
2. Your Costs Will Decrease When You Retire
One of the first steps in preparing for retirement is to find out how much you expect to spend each year. Many people assume that their spending will fall by predicting that they will only spend about 70% to 80% of their retirement income.
This may be true because some costs will be removed once you leave your job. You will no longer pay for a trip, and you will probably spend less on dry-cleaning and other work-related costs. But you can spend more in other areas.
Retirement is essentially a long vacation, which means you have many opportunities to spend money. It may be more tempting to go shopping every afternoon simply because you can or would like to take a one-month trip to the beach because you no longer have to worry about using all your weekends. If you do not set your spending limit, it can quickly get out of control.
You may also spend more on retirement health than you worked at work. Planning health care costs may be difficult because you will not know exactly what you are about to expect. At the very least you have to budget for bonuses, deductibles, and co-insurance (even with Medicare coverage) that can cost thousands of dollars a year. In the early years of retirement, when you are relatively young and healthy, health care costs may be minimal. But as your age grows and your health begins to decline, your costs may increase rapidly.
3. Long-term care is not a priority
When you are excited to start a new retirement adventure, thinking that you will spend your last years in a nursing home is perhaps the last thing you think. Seven out of ten senior adults will need long-term care at some point in their lives, according to the US Department of Health and Human Services (HHS), so it's important to think about how you will cover these costs.
You may decide to postpone the concerns about this expense until a need arises. After all, why do you prepare for something that you are not even sure you will need? Nonetheless, long-term care is extremely expensive and not prepared for it, it may exhaust your pension fund within a few months.
The average stay in the semi-private room in a nursing home costs about $ 6800 a month, according to the HHS. That amounts to about $ 82,000 a year. Also, 20% of those who need long-term care will require it for at least five years. With a price of $ 6,800 per month, that's about $ 408,000.
The trick is that Medicare will usually not cover long-term care, so the money will have to come straight out of your savings. And given that most people will not need care in a nursing home until their recent years, there is a good chance that your savings will have withered out until then.
Long-term care insurance can help cover some of these costs, but will have to be booked relatively early. This insurance is known for its high premiums, so you can expect to pay several thousand dollars a year for coverage. But if you wait while you are already retired or need long-term care, you will face even higher rates or you will be refused to be fully covered. even a seemingly harmless mistake can cost you thousands of dollars. But by doing your research in advance, you will be able to enjoy your later years.