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Habits That Destroy Your Retirement

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A whopping 39 percent of Americans have nothing saved for a rainy day, let alone retirement. This is a scary statistic! If COVID-19 has taught us anything this past year, it’s that having an emergency fund is critical to weather unexpected financial storms.

We all have habits that undermine our ability to save money. Consider what these habits are and how to prevent them from destroying your retirement.

Spending Now Rather Than Saving for Later

With our culture of instant gratification, it’s easy to focus on the present and neglect potential needs for the future. The best way to avoid this habit is to stick to a budget. If you don’t already have one, there are plenty of resources available to help you create one.

By keeping track of how much money is coming in, and what expenses are going out, you can calculate the amount you have left over to spend on “extras” each month. Just remember to allocate at least 10 percent to saving and investing!

Underestimating the Amount You’ll Need for Retirement

As you project what your budget after retirement may look like, don’t forget to include these three factors:

  • Taxes: As a W2 employee, your employer automatically takes taxes out of your paycheck. Once retired, you have to plan for those withholdings yourself.
  • Health insurance: Under your employer’s group plan, health insurance is quite affordable—and automatically deducted from your paycheck. Once you retire, you become responsible for your own health insurance. If you stop working early and aren’t yet eligible for Medicare, your premiums may be quite costly.
  • Free time expense: With more time on your hands after retirement, you may end up spending more money each week, whether it’s on golfing, traveling, or pursuing hobbies.

Only Investing in the Best-Performing Funds

Chances are, if you only invest in funds that have earned a Morningstar rating of Gold or Silver, you’re already late to the game. Funds that are top-rated today may not sustain that excellent track record because the Morningstar system only looks at short-term performance.

If you constantly chase returns based on one- to three-year performance, your portfolio will end up under-performing in the long-term. You’ll achieve more sustainable returns if you look at a fund’s 10- or 15-year track record before deciding whether to invest in it.

Misunderstanding What Diversification Is

Diversification is about more than just owning multiple funds. It’s important to consider the balance between stocks and bonds, your investments in large companies vs. small companies, and how much money you have in domestic vs. international funds. As a rule of thumb, you should always keep your top 10 holdings below about 20 percent of the portfolio’s total value to ensure adequate diversification.

For more on how to prevent bad habits from destroying your retirement, please contact Nelson Financial Planning. Our goal is to help you change your life through a successful financial plan that provides peace of mind for the future.