One of the most important financial goals for your future is retirement planning. When done correctly, you will be assured financial independence and freedom later in life. To avoid the most common retirement mistakes, you must be realistic about your future and plan ahead.
Unfortunately, it is all too easy to make poor financial decisions when planning for retirement. The Federal Reserve reports that 37% of non-retired adults believe their retirement savings are on track. However, neither the 44% who say their savings are off track nor the remaining 19% who are unsure set out to sabotage their retirement.
Retirement planning used to be much simpler. You worked for the same company and retired at 65 with a gold watch and a company pension.
It’s more complicated nowadays. Most people will change jobs several times or work for themselves at some point. Simultaneously, life expectancy is rising. On the one hand, more retirement years to enjoy. On the other hand, you have more retirement years to save for.
Those who believe their financial future is bleak did not deliberately jeopardize their retirement. Instead, they made some unnoticed mistakes along the way. Fortunately, it’s never too late to get back on track if you avoid these seven retirement missteps.
Mistakes You Should Avoid
1. Not implementing a retirement plan
Not having a retirement plan is the main error most people commit. Have you calculated the precise amount of money you will require when you retire?
When creating a retirement plan right for you, several factors include the time you have until retirement, where you want to retire, the kind of lifestyle you want, and your general health.
2. Not having a saving plan.
Your savings need to be directed in some way. Anyone with a 401(k) plan should be aware that, whether they realize it or not, they are already investors.
By changing your perspective from “saving for retirement” to “investing for retirement,” you can more clearly see how the market works when you make contributions to a 401(k), which will ultimately help you achieve your objectives.
Before deciding how much money to save, make a plan that considers your anticipated lifespan, planned retirement age, retirement location, general health, and the lifestyle, you want to lead. This will help you avoid ruining your retirement and running out of money.
3. Not having an estate plan.
You should take precautions to safeguard the things you’ve worked so hard to create for your family and yourself. You will also require powers of attorney for healthcare and property. These two things work together to build your estate plan.
An estate plan is not just something that the wealthy need. You should have a will that specifies who will receive your property and names an executor (the person you choose to administer your estate). A strong tool for ensuring the future of your loved ones is your will.
4. Not Considering the Tax Impacts
It’s crucial to think about tax implications and what will work best for your financial situation both now and in the future when implementing retirement planning.
When you retire, what tax bracket will you be in? Is it preferable to pay taxes upfront or after a withdrawal? These are issues to think about and go over with a tax advisor.
You can pay your taxes in full with a Roth 401(k) or Roth IRA. Better still? It will be tax-free to withdraw money when the time comes.
Investing in these accounts can be beneficial if you anticipate paying a higher tax rate in retirement. Stay with a traditional IRA or 401(k) if not (k). You can pay your taxes when you withdraw from one of these tax-deferred plans in the future.
5. Not Investing Properly
Make wise investment choices, whether using a company retirement plan, a traditional, Roth, or a self-directed IRA. A self-directed IRA appeals to some people because it gives them more investment options. That’s not a bad choice, as long as you don’t put your savings at risk by following unreliable sources’ “hot tips,” like putting all of your money in bitcoin or other extremely risky investments.
Self-directed investing typically entails a steep learning curve and the guidance of a reputable financial advisor. Another unwise investment choice is paying high fees for actively managed mutual funds that perform poorly.
Borrowing from your retirement funds.
Six in ten Americans withdrew or borrowed money from a 401(k) or individual retirement account during the pandemic (IRA).
If you withdraw your savings before age 59, you will face a 10% penalty. This unexpected pandemic, if anything, reminded us all of the importance of having an emergency fund. This should cover at least three months of expenses, so you don’t have to borrow from your retirement funds.
6. Not planning for healthcare issues and long-term care costs.
The high cost of long-term care can quickly mount up. A nursing home in California costs more than $9,000 per month on average.
If you do not factor these costs into your retirement plan now, you may end up like many other families who run out of money within a year of entering a nursing home.
We can assist you in developing a comprehensive plan to protect your assets and qualify for Medi-Cal assistance to offset the cost of long-term care.
7. Taking Social Security Benefits Early
The longer you wait to apply for Social Security, the greater your benefit (up to age 70). You can file as early as 62, but full retirement is not available until you are 66 or 67, depending on your birth year. To receive the most benefits, it’s best to wait until you’re 70 years old.
The only time this needs to be clarified is if you’re sick. Another factor to consider: If spousal benefits are an issue, filing at full retirement age may be preferable so your spouse can also file and receive benefits from your account.
However, don’t expect Social Security to cover your retirement expenses. You must have a well-diversified retirement portfolio that includes savings, Social Security, stocks, and bonds. And, if you haven’t already, start stashing away whatever you can as soon as possible. Even if it’s only $25 per month, it’s better than nothing.
Regardless of where you are on the retirement spectrum, you have most likely made mistakes. If you need more saved, try to start saving more right away. Take a part-time job and put your money into a retirement account. Any raise or bonus should be directed to your investment fund.
Aside from avoiding the problem areas mentioned above, seek advice from a trusted financial professional to help you stay—or get back—on track.