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Barriers to a Comfortable Retirement

The fact that so many Americans are not adequately prepared for retirement has been widely documented.  According to a recent government report, about half of households age 55 and over have no retirement savings and many older households without retirement savings have few other resources to draw on in retirement.  A comfortable retirement is a goal all of us are trying to achieve.  As we move along with the daily challenges of life, it can become daunting to focus on, or even think about retirement.  Yet we all need to do it.  Given this, it is important to think about the obstacles that stand in the way of a comfortable retirement so that we can deal with them before it becomes too late.

Here are some of the biggest barriers to a comfortable retirement:

  1. Not knowing how much is needed for retirement – Much research shows that many pre-retirees and retirees do not consult with a financial advisor.  A consequence of this is that many people underestimate how much savings is required to fund a comfortable retirement.  Consider hiring a financial advisor to help develop a financial plan to assist you with determining what your retirement needs are and how you are going to meet those needs.
  2. Not knowing how much to save – Closely linked to knowing how much is needed to fund a comfortable retirement is understanding how much to save each year to reach your goal.  Just the act of saving many times will not be sufficient to reach your retirement goals.  The earlier you start, the better off you will be.  Time value of money is a powerful tool and one that you should begin using sooner rather than later.  Contribute as much as you can to your retirement plan and increase your contributions whenever possible.  If you don’t have a retirement plan available to you, contribute to an individual retirement account.  Cutting expenses whenever possible and living below your means can be vital.
  3. Assuming expenses will go down in retirement – Conventional wisdom would make you believe that expenses will go down in retirement.  This is not always the case.  Better health, active lifestyles, spiraling health care costs, caring for elderly parents and supporting children and grandchildren can all result in higher than expected costs in retirement.  Moreover, people are living longer now than they used to and you want to be careful not to underestimate your longevity and therefore the duration of your expenses over your lifetime.
  4. Unrealistic return expectations – Many people have unrealistic expectations of what they will earn on their investments in the long run.  Many expect double digit returns year in and year out.  While those types of returns will occur from time to time, it is not realistic to think it will occur every year.  Related to this issue is the withdrawal rate from your investment portfolio.  It is essential that you do not withdraw too much from your portfolio each year.  A general rule of thumb is to withdraw no more than 4% of the value of your portfolio in any year.
  5. Ignoring inflation – Inflation has been low in recent years, but certainly hasn’t disappeared and it will likely rise in the future.  Because of this, you do not want all of your assets invested in cash or fixed income securities in retirement and want to make sure you have some exposure to equity investments that have a chance to beat the inflation rate.

Saving for retirement can seem daunting, but a little planning can go a long way to ensuring a comfortable retirement.