Is there such a thing as a perfect retirement savings plan? Probably not. Can you find a retirement savings plan that works for you? Most likely.
If you’re already making a savings plan every year, you’re ahead of the pack. You’re already asking the right questions. To put it simply, most people don’t plan for retirement. Retirement is a thing that happens far in the future, so there’s nothing to worry about.
That attitude changes as people near retirement age and it’s a shame it doesn’t happen sooner.
Since I started my career, I’ve always thought about saving for retirement. I wasn’t always detailed and I didn’t always budget my money and pay myself first. However, I did spend time watching my money and making sure it was going to the right places (or at least I thought).
My mindset has changed in the last five years. I started creating a more detailed retirement savings plan.
A perfect retirement savings plan is a unicorn. It doesn’t exist.
That’s what I want to write about here. I want to explain the various ways in which you retirement savings plan can be flawed.
Don’t take this information the wrong way.
If you’re a reader of this blog, I’m certain you’ve thought about how you best save for retirement. Maybe you’ve even developed the perfect retirement savings plan. With that plan, you’ll certainly have enough money for retirement and you’ll retire with ease.
I’m here to tell you you’re wrong. There is no such thing as a perfect retirement savings plan.
A perfect retirement savings plan is a unicorn. There’s no such thing.
When you’re saving for retirement, crazy things will happen to you. It’s Murphy’s Law. There will be things you didn’t think about. Some things you could have prepared for, but others are simply waiting in the bushes, biding their time until they jump out at you.
At this point, you might be pissed off and thinking to yourself, “This guy has it all wrong.” That’s OK. I completely understand.A perfect retirement savings plan is a unicorn. It doesn't exist. Click To Tweet
Your retirement plan doesn’t need to be perfect.
But here’s the thing. You don’t NEED a perfect retirement savings plan to retire comfortably or even retire early.
Nobody’s career is perfect. Our lives are filled with disappointment and turmoil when things don’t go as planned. Businesses fail everyday, but still give us lessons on how to generate wealth.
Basically, you make mistakes. You make retirement decisions with incomplete information. Mistakes will happen when you don’t know everything.
It’s like trying to build a house, but you don’t know a hammer and nails exist. The task of building that house just became 10 times more difficult.
You don’t need perfect to be successful. “Il meglio è nemico del bene” or “The better is the enemy of the good.” That phrase was popularized by Voltaire in the 1700s. It’s telling us perfect might keep us from experiencing the good enough. Remember that.
1. Your perfect retirement savings plan didn’t account for expense ratios
When you invest in mutual funds and index funds, you’re paying the company a fee. It’s pretty easy to miss. Some of these fees might be high and they add up over time.
With a million dollar retirement account, a 0.70% expense ratio can cost you $115,000 over ten years. That’s a butt load of money. Money that should be in your account.
Personally, I can raise my hand and say my retirement plan includes some high expense ratios. I’ve had a bunch of success with T. Rowe Price funds. As far as I can tell, they’ve outperformed Vanguard funds (although Vanguard is considered ultra low cost).
You don’t always need to pick the funds with the lowest expense ratios. The main point to take from here is this: Expense ratios can put a damper on your retirement savings if you’re not careful.
2. Your estimates were too optimistic
In the past five years, it’s easy to get caught up in above average returns. As these 10%+ returns become normal, it’s easy to assume they’ll continue in the future.
Being over optimistic when planning your retirement savings is a recipe for disaster. It’s extremely hard to achieve 10% returns over 30 years.
For example, Investopedia tells us you should expect to earn 5% to 8%, on average, in your 401k. That’s still great and you can work with that. You can design a great retirement savings plan around 5% to 8% annualized returns over the years.
Your average rate of return is something to think about. Retirement plan numbers change drastically when you start estimating using 10%, 12%, and 15% returns. Those are huge gains and oftentimes, not sustainable.
It’s more than likely better to be a little conservative. In the best case, you have a bunch more money than you expected. In the worst case, you’re still just fine and can retire as you please.
3. You have too many eggs in one basket
Diversification is a rule most of us have heard. It’s like betting all your money on black. You might have some success once or twice, but you’re bound to lose it all in the long run.
That’s what diversification is about. However, do you really know if you’re diversified enough?
If you’re invested in a mutual fund, you might be surprised you’re not that diversified. For example, take a look at this fund from T. Rowe Price. The 10 largest holdings are: Alphabet, Amazon.com, Danaher, Facebook, MasterCard, Microsoft, Morgan Stanley, Priceline, UnitedHealth Group, and Visa.
If you own this fund (like I do), you might say it’s not too diversified. In the top 10, there are 4 tech companies, 2 credit card companies, a bank, a health insurance provider, a holding company, and a travel company.
I think you can reach your own conclusion by reviewing that list.
Basically, here’s what I’m saying. Just because you have an index fund or a mutual fund doesn’t mean you’re diversified. Some index funds are actually not that diversified. You’ll want to do a little research and decide if you’re diversified or not.
4. You’re paying too much in taxes
If you’re not taking advantage of your 401k, an IRA, or an HSA, you’re paying way too much in taxes. Taxes can eat away at your retirement savings and gains. Taxes hold you back from your potential.
One thing you should check up on is your tax withholding. For example, if you get a big refund check every year, you’re giving the government an interest free loan.
Your big tax refund check could be invested and earning money. Don’t miss out!
To remedy the situation, you should adjust your tax withholding. There are a few ways you can do this. One way is to update your Form W-4. You can resubmit or update this form through your employer.
Basically, the idea is to pay no more or no less than you have to. Ideally, you wouldn’t get a tax refund nor would you have to pay extra. That’s extra money you can put aside in your retirement savings plan. Neat, right?
If you want to learn more, Money Crashers has a great article on adjusting your tax withholding allowances.
5. You didn’t accurately estimate your retirement lifestyle
Over the years, you may be accustomed to a certain lifestyle. It’s easy to fall into a routine.
Make note of your lifestyle and ask tougher questions. Do you want to maintain your pre-retirement lifestyle when you enter retirement? At this point in my life, the answer is yes. For some people, it might be no.
Many prospective retirees out there want to travel the world or start a new business. Depending on how you want to travel and what business you want to open, your lifestyle expenses may creep higher and higher.
On the other hand, you may want to settle down and relax. Just be honest with yourself. Can you really live on $30,000 per year?
Accurately estimating your retirement lifestyle goes along with being too optimistic. In general, you should be conservative. If you plan on living on $60,000 per year, you’ll have a smile on your face if you can actually make it on $30,000.
6. You failed to plan for the recession
This is kind of a joke. There’s no way you can plan for a recession. A recession is going to pop up whenever the hell it wants.
If you could accurately plan your way around recessions in the markets, you’d be a rich dude. Like, super filthy rich.
However, you CAN be proactive and build in random events of misfortune to your savings plan. This is something the weatherman has done for years. Chaos theory plays a big part in predicting the weather and many other systems in life.
Plan for the worst. Assume that you’ll run into a recession in the future. Does your retirement plan survive? Will your retirement be delayed or do you have a Plan B?
Planning for retirement is all about probability. If A happens, how often does B happen? If a recession hits when I’m 55, what’s the chance I can still retire at 60?
By being a little conservative with your retirement plan, you can absorb almost anything. And if nothing bad happens, you’ll be well beyond your goals already.
7. Your employer failed to tell you it was stealing from your 401k
This was one of the those things where I said “WTF” when I first heard about it. There are companies out there who actually steal from 401k accounts. Crazy, right?
When you contribute to a 401k, your employer withholds the money. At that point, your company should facilitate the transfer to your 401k. If you’re checking your 401k balances, you’ll notice this right away.
Many people forget to check their 401k. When they leave jobs, they even forget to roll it over into an IRA or to their new 401k program. Some companies go out of business and it becomes difficult for people to get their hands on the 401k funds.
If people are forgetting their 401k accounts, do you think they’ll notice their employer stealing from it? Probably not.
By staying in tune with your retirement plan, you’ll avoid this situation altogether. However, if you have any suspicion, review these 7 signs your employer is stealing from your 401k.
8. Your debts won’t be paid off before you retire
Many personal finance bloggers out there emphasize paying off debt. Some of them successfully pay off student debt in just a few years. There are even people out there tackling their entire mortgage in less than ten.
Most people aren’t like that. They take on debt and maintain a certain amount up until retirement. As much as 30% of homeowners 65 or older have yet to pay off their homes. That seems crazy to me.
Debt can really hurt when you’re in retirement. Your retirement income is dependent on how much you saved during your lifetime. Trying to attack your debt with huge payments is difficult.
In retirement, it’s likely too hard to pay off a big mortgage in less than 10 years.
Before you’re planning to retire, consider working in larger payments to repay debts. Try to avoid carrying debt into retirement. Although this will likely slow you down and reduce your savings rate, you’ll be happy to be without the debt.
9. Your plan depends too much on social security income
If you have any interest in personal finance, you most likely already know to avoid using social security in your plan. Social security just doesn’t cut it.
I would venture to say you should disregard social security altogether. Doing so, you stay conservative. You’re not counting money you may never receive.
If you do eventually receive social security, you get an added bonus. You’re not depending on the money, so you can treat it like a special treat.
If for some reason you are depending on social security before you retire, consider changing your plan. A retirement savings plan is deeply flawed if social security is a major component.
To reduce your dependence on social security, you can take advantage of a few things. If you’re older, 401k plans and IRAs allow bonus contributions. These are contributions exceeding the typical annual limit.
For example, if you’re 50 or older in 2017, you can contribute an extra $6,000 to your 401k. For an IRA, that number is $1,000.
10. You forgot to include gifts to your children
My wife and I don’t have any kids at this point in our lives. To be honest, I haven’t thought much about kids and how they fit into my life.
Like most people, I’m almost certain we’ll have kids at some point. However, I’m the first to admit my retirement savings plan doesn’t consider kids. I’m sure that will change once we have a couple rugrats running around the house.
But there’s another reason you should think about kids as you think about retirement. Do you plan on offering some support to your kids once you retire? Do you want to pay for some of their education?
If you’re like most millionaires, you likely value education. You’d be more than happy to contribute to the education of your son or daughter. If you’re young and don’t have kids, did you consider this? I know I didn’t.
Basically, I’ve only been thinking about my wife and I. I don’t think that’s selfish or anything – it’s just something we’re not thinking about at the moment. Like other people have mentioned, staying focused on one thing lets you achieve your goals faster.
As we start thinking more and more about kids, I’ll be working them into my retirement plan. Make sure you do the same.
Related Reading: Best Wealth Building Lessons: 21 Lessons From Big Business
In my opinion, there’s no such thing as a perfect retirement savings plan. It’s like trying to predict the future. You’re just stumbling along in the dark.
However, I don’t think you need a perfect plan. You simply need a plan that’s good enough. Obviously, saving nothing and relying on social security just isn’t gonna cut it.
Here’s the good news. If you’re saving a little bit every year, you already have the mindset. You might even be ahead of most people out there. Congratulations.
If you watch out for things like high expense ratios and take advantage of all of your tax breaks, you should do just fine. And although you might like your big tax refund check every year, it’s probably better to avoid it. Instead, you can increase the size of your paycheck.
You don’t need to try to reach for perfection. Oftentimes, chasing perfection can lead to unhappiness. Realize that you’ll be just fine if you have a plan that’s good enough.
A good retirement savings plan is like kneading dough. If you knead it too much, you’ll dry it out. Knead it just right, and you’ll be eating great food in no time.
Do you think you have a perfect retirement savings plan? Let us know in the comments below.