Retirement planning is a crucial aspect of ensuring a comfortable and financially secure future. However, many individuals who take a do-it-yourself (DIY) approach to retirement planning often fall short in several areas. Here are the three biggest retirement planning gaps I see among DIYers.
Gap 1: Underestimating Longevity Risk
One of the most significant gaps in DIY retirement planning is underestimating longevity risk. People often fail to consider just how long they might live in retirement. With increasing life expectancies, it’s not uncommon for retirees to spend two or three decades in retirement. This extended period requires a substantial amount of savings to maintain a decent standard of living.
Many DIYers focus on a specific retirement age and a target savings amount without factoring in the possibility of living well into their 80s, 90s, or even longer. As a result, they may run out of money later in life. To address this gap, DIYers should use longevity calculators and consider planning for a longer retirement period. This may involve saving more aggressively, delaying retirement, or exploring additional income sources in retirement such as part-time work or rental properties.
Gap 2: Neglecting Inflation
Another common gap in DIY retirement planning is neglecting inflation. Inflation erodes the purchasing power of money over time. If retirement savings are not adjusted for inflation, the value of those savings will gradually decline. DIYers often focus on a fixed savings goal without considering the impact of inflation on their future expenses.
For example, if you plan to have $500,000 in savings at retirement and assume a 3% annual inflation rate, the purchasing power of that $500,000 will be significantly less in 20 or 30 years. To account for inflation, DIYers should incorporate an inflation-adjustment factor into their retirement planning. This can be done by using retirement calculators that take inflation into account or by regularly reviewing and adjusting their savings goals to keep pace with inflation.
Gap 3: Lack of Diversification
A third major gap in DIY retirement planning is a lack of diversification. Many DIYers put all their eggs in one basket by relying too heavily on a single investment asset class, such as stocks or bonds. While these asset classes can provide good returns over time, they also come with risks. For example, a stock market crash can severely impact a portfolio that is heavily weighted towards stocks.
To avoid this risk, DIYers should strive for a diversified portfolio that includes a mix of asset classes such as stocks, bonds, real estate, and alternative investments. Diversification helps spread risk and can provide more stable returns over the long term. Additionally, DIYers should regularly review and rebalance their portfolios to ensure that they remain properly diversified.
In conclusion, DIY retirement planning can be a great way to take control of your financial future. However, it’s important to be aware of the common gaps in DIY planning and take steps to address them. By considering longevity risk, accounting for inflation, and ensuring proper diversification, DIYers can improve their chances of a successful retirement. It may also be beneficial to consult with a financial advisor from time to time to get professional guidance and ensure that your retirement plan is on track.
