My retirement planning mistakes were plenty. But at the time that I made these mistakes I honestly thought I was making the best decision in my own interest!
Today I know I was ignorant, I listened to the wrong opinions, and retirement was a lifetime away – so why the urgency!
So, with the benefit of hindsight, I'm going to try and enumerate the most important, or rather worst, retirement planning mistakes I made. Perhaps you can still avoid the same mistakes.
During my earlier years as an employee and entrepreneur, I did no planning. Or rather, I can't recall that I did some formal planning. My wife and I were big on consumption and I certainly did some financial planning to support our consumption lifestyle. But it was only when I turned fifty that I realized my retirement provision was hopelessly inadequate. That's when I started with serious retirement planning.
No planning is probably the most fatal retirement planning mistake you can make.
Not exploiting the full benefits of tax breaks for retirement provision
I tried to get away with the minimum contribution to a retirement plan that my employer and statutory regulations stipulated. In my early employment years I probably understood that my contribution as well as my employer's matching contribution was untaxed money. I probably understood that the income earned in the plan was not taxed either. But I didn't appreciate the exponential growth effect of these tax breaks.
With the benefit of hindsight I know today that I should have contributed the maximum allowed by my terms of employment and statutory rules. It would have put a damper on my early employment consumption, but I would have avoided the panic saving strategy that I had to apply when I woke up at age fifty!
Not exploiting the full benefit of the available tax breaks is probably the most common retirement panning mistake made.
Not making saving for retirement a priority
For the larger part of my productive working life, saving for retirement was a nagging irritation but definitely not a priority. It was only after I woke up that it became a top priority, but at that phase of my life I had lost the full benefit of time and tax deferral.
Cashing out instead of rollover at change of employment
I recall the time when I left one of my first employers after some ten years of service. I had the choice of rolling over my retirement savings into my new employer's retirement provision plan or take the cash.
I took the cash. I probably paid some penalties and tax on that, but all I could see at the time was the substantial lump sum! I bought an upmarket sound and music system with the money. That was thirty five years ago and I still have the same basic sound and music system, but it was a mistake to cash out. If I did a rollover at the time, my retirement provision picture would not have been so bleak at age fifty!
According to a friend who is a retirement planning advisor, this retirement planning mistake is causing the most misery in the long term to his clients.
Not applying minimalism
As I mentioned before, my wife and I were big time consumers. We always wanted to go bigger and better. House, cars, holidays! We had a fantastic time in the process, but we were literally spending as if there was no tomorrow!
More or less at the time that I woke up to the fact that time was running out and our retirement provision was inadequate, we visited dear friends at their new house in California. I always knew that these friends were extremely wealthy. Their new house and garden blew our breath away. But to our surprise they maintained the minimalism in furniture and decoration that they had in their former house.
Finally the penny dropped for me: They bought stuff that were timeless and durable, and practiced minimalism throughout. That gave them the edge.
That visit changed our attitude and we were amazed how quickly our retirement savings grew after we stopped being consumers! We should have done it right from the start.
This is not one of the best known retirement planning mistakes, but do take note.
Cashing out of maturing annuities
When I reached the age when I could cash out my annuities without incurring penalties, I cashed out as much as I could. I thought I could invest it better than the particular insurance or investment company. By law I had to leave a portion of these savings in the annuities, and when I see today how well these investment did, I know that it was a mistake for me to cash out my annuities at the time. The investments I made with the cash at the time did not perform nearly as well.
Withdrawing too much initially
At the time of my retirement, the markets were doing well and my investment portfolio income was roaring ahead. I made the mistake of drawing more than 6% pa of my savings. I did not foresee the recession and ensuing depression that was to come.
I think if I stuck to the widely recommended 4% pa withdrawal, the effect of the depression on my investment portfolio might not have been as severe.
Retired too early
I retired early and couldn't wait to hand over. At the time I was CEO of an International IT company and I was stressed out of my mind!
Now, more than ten years later, I am getting bored and I miss the action. My wife and I had the best time of out lives and we traveled extensively after retirement, but I think I should have taken a part time position at the time, with less stress, doing some technical stuff that have always been my passion.
Underestimating medical costs
Up until retirement and a few years beyond, my wife and I virtually never had to get medical treatment except for the odd visit to a dentist. Our friends were horrified by our diet of fruit, raw vegetables, and fat free protein. We thought that we were living as healthy as possible. We were both fit.
I took out the cheapest medical insurance available. And then I suffered a massive heart attack! Two stents were fitted to keep the arteries open. I switched to a strict Atkins diet and lost a lot of weight. I thought I was untouchable!
Five years later one of the stents was found to be clogged and I had to get a bypass. My wife had to undergo a series of operations in the mean time. I upgraded our medical plan, but I still underestimated the medical costs not covered by the plan.
For me this was the most unexpected retirement planning mistake I made!
Underestimating the effect of inflation and taxes
I was aware of inflation and taxes all my life. But in retirement, when there is no regular income stream, these two enemies become formidable. Especially when the economy is in a depression and your investment portfolio shrinks annually.
New taxes seem to pop up from nowhere. Property tax starts to become a major expense. And in general prices seem to rise monthly in spite of government propaganda that inflation targets are under control.
In my retirement income planner projections I made the mistake of estimating inflation to average at 4% pa. I think I should have calculated it at an average inflation rate of at least 6% to include also the rise in taxes.
Investing in something that sounded too good to be true
In spite of the fact that I have always refrained from investing in something that sounded too good to be true, I fell for it during retirement! My son got involved in a business that seemed solid enough. It made huge profits and paid unheard of dividends. Eventually I was tempted and invested the equivalent of one year's retirement expenses. I knew it was high risk because I advised certain family and friends, who I knew could not afford to lose what they would have to invest, to stay clear.
It turned out to be too good to be true. I lost my entire investment. My son leveraged his investment and invested, and lost, much more than I did. However, he is still young enough to recover financially.
These were my retirement planning mistakes. My consolation is that, when I look around me at the performance of friends and colleagues, we all made mistakes. Some worse than others. By the Grace of God I survived my retirement planning mistakes. So far!
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