Be aware of these 3 common mistakes to ensure a comfortable retirement

The goal of a comfortable retirement can be challenging for many. Even those that plan ahead can fall victim to a number of pitfalls. To help consumers achieve their retirement goals, we've identified some of these mistakes and provided advice for avoiding them.

1. Underestimating Retirement Expenses

Perhaps the most important factor in assessing the adequacy of one's retirement savings is the estimated financial costs of retirement. One common mistake is to underestimate how much money one will require after retiring. There are a number of reasons that people commonly make this mistake.

First of all, individuals tend to ignore the impact of inflation on their expenses. Additionally, individuals may underestimate how much medical attention they will require later in life. While the United Kingdom is blessed with the NHS, some people prefer private health care or might prefer to seek medical attention elsewhere. Finally, many individuals have a hard time predicting how much money they will spend once they are not working.

For example, many will have more free time for vacations than during their retirement. To avoid a financial crisis later in life, it is important to recognise the tendency to underestimate retirement expenses and plan a more appropriate retirement savings goal.

2. Too Little Too Late

Another very common mistake is to put off retirement savings until later in life. We can explore these through 3 different scenarios.

Scenario A = An individual who saves £400 per month from age 25 to 65 will accumulate approximately £582,100 assuming an annual return of 5 per cent.

Scenario B = An individual who saves £600 per month starting at age 35 will have £482,200 in retirement savings with the same annual return. 

Finally, Scenario C = The individual that starts saving £1200 each month at age 45 will have £478,000 at age 65, again assuming a 5 per cent annual return.

This highlights the power of making regular contributions and of compounding interest over a longer period of time.

3. Letting personal debts grow out of control

Accruing too much debt is another obstacle to retirement. Personal debts are often useful (e.g. student loans, home loans) and sometimes unavoidable. However, left unchecked, these debts can significantly eat into your retirement savings.

For example, while credit cards offer a great opportunity to accumulate rewards, if they are used unwisely they can quickly rack up debt, given that unpaid monthly balances face interest rates of 25-30 per cent p.a. Therefore, it is important to pay down existing debts, especially those that come with high-interest rates.

Key Takeaways

Depending on your circumstances, there may be a variety of factors that would prevent you from a comfortable retirement. However, some retirement planning hurdles can be avoided with personal planning and planning from financial advisers. At MWS financial advisers limited we can look at your retirement portfolio as a whole and provide options for you to reach your retirement goals.

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Financial Conduct Authority number 458676.

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Registered and trading office address: 9 Station Road, Knowle, Solihull, West Midlands, B93 0HL.


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