Unfortunately, planning for retirement isn't an exact science. There's no one-size-fits-all when it comes to saving the right amount for your golden years--which is part of what makes retirement planning so nerve-wracking for a lot of us. But financial experts agree on a few hard-and-fast rules for what you shouldn't do:
1. Don't be overly optimistic
People are generally hopeful, says Tami Simpson, CFP and president of Wealth Financial Group West, a retirement management services and financial consulting firm in Southern California. But too much positive thinking isn't the best recipe for saving. And it turns out, a healthy dose of pessimism is actually a good thing for your retirement planning.
"One of my biggest challenges in [retirement] planning," Simpson says, "is that 'hope' keeps people from saving what they should."
On the one hand, some people put off the hard work of actually socking money away, because they simply "hope" that things will somehow fall into place down the road. Economists refer to this as optimism bias or the planning fallacy. We imagine the best-case scenarios and overestimate our chances of financial success, while failing to take into account the unexpected events that could occur.
At the same time, Simpson says, folks can get foolish about their asset allocation and their investment choices and take inappropriate risks with their money based on an overly rosy view of the future. When it comes to retirement, give up "hope," says Simpson, and take a more pessimistic view of your own financial picture.
In other words, don't just wish for sun — plan for rain.
2. Don't underestimate your spending
Years ago, retirement meant sitting and rocking on the porch, says Annalee Leonard, president of Mainstay Financial Group in Florida. Nowadays, she points out, seniors are rock climbing, traveling, creating new careers — and living longer than ever.
But people are still underestimating how much they'll be spending in their golden years and often think they'll have less discretionary costs and lower overhead than they did when they were working full time. As Fay Sheppard, a financial adviser at Wells Fargo Advisors, reminds her clients: Retirees often take more vacations, make more home improvements, and dine out more frequently than they did before they left the workforce.
And don't forget about medical costs, housing and basic daily needs. "You may not realize it," Sheppard says, "but many Americans now live until they are 90 or 95 years old."
Thanks to longer life expectancies, retirement can now last 20 or 30 years, and your money needs to stretch much farther than it used to. According to Sheppard, during the next two to three decades, your cost of living will likely double — maybe even triple. So folks need to remember that inflation can eat away at savings and threaten a person's ability to maintain a comfortable, healthy lifestyle during this new, lengthier period of retirement.
Leonard encourages her clients to focus clearly on their future expenditures. "We have to look at income, inflation, long-term care needs and emergencies," she says. "Too many people think things will handle themselves."
3. Don't focus only on investments
Of course, growing your nest egg is a crucial part of retirement planning. But it's just as important to learn to live within or even below your means throughout your working years, according to Jeff Yeager, author of "How To Retire The Cheapskate Way: The Ultimate Cheapskate's Guide to a Better, Earlier, Happier Retirement." By living strictly within your resources, he says, you are test-driving your retirement budget, when you won't have a paycheck coming into your bank account anymore.
According to Yeager, paying off all of your debt before you retire is as central to a good long-term plan as the size of your retirement fund (what most of us spend the bulk of our time worrying about). Frugal folks, he believes, see that the greatest retirement asset as something you don't have: debt.
4. Don't worry about being "selfish"
The ultimate "cheapskate advice?" Consider postponing retirement, downsizing your lifestyle or even selling off some of your investments to pay off your home mortgage and credit cards, before you leave the workforce.
Unfortunately, for many people, the "self" part of retirement can seem selfish, explains Sheppard.
But retirement means reprioritizing. And for some of us that may require a shift in our mindset from the years where we've been "other focused" — paying for our children or helping friends or relatives. Preparing for retirement is a time when you have to concentrate on your own financial well-being and prepare for the period in your life where you won't have the same kind of income stream you had while you were working.
"I see clients in late retirement funding their children when they themselves are at risk financially," says Sheppard.
For many early and mid-life expenses, like education, buying a home or a car or starting a business, there's financial help that doesn't exist when it comes to funding your golden years. For instance, there are always student loans, scholarships, part-time jobs and low-interest mortgages for younger people — while there are no similar options when it comes to financing retirement. And while it's tough to say "no" to our loved ones, financing your kid's lifestyle at your own expense isn't a workable solution for anybody.
As you age, there's less financial wiggle room to rebound from any losses. It's important to leave your retirement funds intact for yourself, no matter how hard it may seem to turn somebody down if they ask for money.
5. Don't put off your financial physical
Most of us are pretty good about getting our annual physicals or going to the dentist, even though we're feeling fine or don't have a painful toothache.
"You go [to your physical] because you're well," says Jack Keeter, CFS and president of Jack Keeter and Associates, an estate and retirement planning firm in Anaheim, Calif. "And God forbid your doctor finds something wrong; hopefully there's enough time to fix it."
As you move through your 40s, 50s and 60s, Keeter tells people that a periodic financial physical is the key to a healthy retirement. He advises everyone to check in with a financial professional before there's a problem and you still have time to correct your strategy, re-allocate resources and get back on track if you need to.
"Sit down with somebody who can offer you informed counsel," he says. "Not products, but wisdom, about what other people just like you are doing under similar circumstances."