Meeting your retirement savings goals is a long process that takes years of planning, saving and investing. Even if you have a perfect plan, it can be difficult to achieve your goals.
Here are four retirement mistakes that are easy to make—and how to avoid them. If you want to avoid making the worst retirement mistakes, you need to be realistic about your future plans and think ahead. According to the Federal Reserve, 37% of non-retired adults believe their retirement savings are on track. However, the 44% who say their savings are not on track—or the remaining 19% who are unsure—likely did not set out to sabotage their retirement. Here are some retirement mistakes that are easy to make—and how to avoid them:
Quitting Your Job
The average worker changes jobs approximately twelve times during their career. Many of these workers do not realize that they are leaving money behind in the form of employer contributions to their 401(k) plan, profit-sharing, or stock options. This is due to vesting, which is when you do not have full ownership of the funds or stock that your employer “matches” until you have been employed for a set period of time (usually five years).
Don’t decide to leave without finding out how much of your vested funds you will be able to take with you, especially if you’re close to the deadline. Consider whether leaving those funds on the table is worth the job change.
Not Saving Now
Compound interest will help your savings grow over time, so it’s important to start saving now. The longer your money is saved, the more it will grow. It’s important to think about the future when making financial decisions, such as whether to remodel your home or support your adult children.
If you want to save for retirement, you should reduce your expenses and save as much money as you can. Most experts say that you should save 10-25% of your income for retirement.
- Roth 401(k)
If your company offers a Roth 401(k), it is beneficial to contribute as much as possible. The contributions to a Roth 401(k) are made with after-tax money. The interest and earnings grow tax-deferred until you withdraw the funds in retirement. And because you made your initial contributions with after-tax money, all of your withdrawals will be tax-free.
If you decide to contribute to a traditional 401(k), Your contributions will be made with pre-tax dollars. However, when you do withdraw the funds in retirement, Uncle Sam will share in the growth of your account. You will have to pay income taxes on the distribution amount. According to the Internal Revenue Service (IRS), the maximum amount you can contribute per year in a 401(k) is $20,500 in 2022. If you are aged 50 or older, you are allowed to make an additional catch-up contribution of $6,500 in 2022.
Regardless of which 401(k) you choose, make sure you take advantage of any matching contributions that your company offers. Also, it’s important to understand if the matching contributions are vested immediately (meaning the money is yours today if you decide to leave the company); or if the money will be vested over the next 5 years (meaning you will need to stay with the company for 5+ years for the company match to be yours).
- IRAs
If your workplace doesn’t offer a 401(k), consider opening a traditional or Roth IRA instead. You’ll have to save more on your own, since you won’t get matching funds from your employer, but you can contribute a maximum of $6,000 per year (or $7,000 if you’re 50 or older) to a traditional or Roth IRA for 2022.
Failing to Plan
How would you like your retirement to look? If you don’t plan and envision your ideal retirement, you may miss out on the opportunity to have the retirement lifestyle you want. Begin planning for retirement long before you stop working and collecting a paycheck.
Some things to consider for retirement are where you want to live, how you will fill your days, and for how long you want to continue working. Additionally, you should map out a retirement budget and look for adjustments to make if you need to reduce expenses, create more income, postpone retirement, or accommodate medical issues.
It is important to keep track of your Social Security, pension and other retirement benefits so that you know how much money you will have when you retire.
Waiting Too Long to Start
Don’t wait until it’s too late to start planning for retirement. Starting early offers several advantages, including more time to contribute to Social Security, to start a profitable business, or to develop a second career. Set long-term savings goals early to make saving for retirement less daunting.
The earlier you start saving and investing, the more opportunity your money will have to grow through compounding. This can have a significant impact on the amount you have saved by the time you retire.
Not Maxing out a Company Match
That’s free money! It’s a good idea to sign up for your company’s 401(k) plan and contribute as much as you can, especially if your employer offers a matching contribution. For example, if you contribute 6% of your salary, your employer might match 3%. That’s free money!
If your company has a matching program for retirement contributions, the IRS will match a certain amount of money up to a maximum contribution limit. For 2021, the total contribution cannot exceed $58,000—or $64,500 for those aged 50 and over with the $6,500 catch-up contribution. In 2022, the total contribution limit is $61,000 or $67,500, including catch-up contributions.
Investing Unwisely
It is a good idea to be smart about the investments you make in either a company retirement plan or a self-directed IRA so that you can make the most of your savings. Self-directed IRAs give you more investment options, but you should be careful about taking on too much risk by investing in things that could end up being worthless.
Most people have to learn a lot to be able to invest in a way that is good for them. It is a good idea to get advice from a financial advisor that you trust.
I would not recommend self-directed IRAs unless you are willing to put in the effort to manage it properly by research investment choices and monitoring fees. For most people, it is better to invest in low-fee exchange traded funds (ETFs) or index mutual funds. Your 401(k) provider is required to send you an annual disclosure outlining fees and how those fees affect your return on investment.
Not Leveraging Tax Breaks
The IRS wants you to save for retirement and offers a few different ways to help you accomplish this. By contributing to a retirement plan, you can potentially lower your current taxes while also saving for the future. Just be sure to factor in taxes when you’re budgeting for retirement.
Employee-sponsored 401(k) plans and individual IRA accounts are not subject to taxes until the money is withdrawn. Contributions can be deducted from current-year taxes, and the money will not be taxed as it grows. Income taxes will be paid on the money withdrawn during retirement.
If you are over the age of 50, you can make catch-up contributions that can be deducted from taxes to help you save more money as retirement approaches.
Contributing to a Roth IRA now can help you avoid being in a high tax bracket in retirement. Your contributions grow tax-free until retirement, and you can withdraw them any time without penalty. You can start pulling money out, tax free, any time after age 59½.
Underestimating Medical Costs
It’s hard to know exactly what your medical needs will be during retirement, but there are some potential expenses you should keep in mind. These include premiums for insurance beyond basic Medicare, prescription costs that aren’t covered by insurance, dental and vision care, and possible long-term care if you’re sick, injured or need help with daily living. Make sure to budget for Medicare and supplemental insurance, as well as long-term care insurance or set aside ample funds to cover long-term care in the event you need it.
Never Mastering Your Pre-Retirement Finances
If you want to know how well you will manage your money in retirement, you should look at how you are managing your money now. If you are always short on money, in debt, and unable to save for retirement or an emergency, you may need to develop some financial skills. It is never too late or too early to learn these skills.
If you want a successful retirement, you should learn how money works and start cultivating money management skills now. This includes budgeting, building credit, and saving regularly. A trusted advisor can be extremely helpful. The closer you get to retirement, the more important it is to optimize your financial health.
Not Rebalancing Your Portfolio
It is recommended that you rebalance your portfolio quarterly or annually to keep the asset mix that you want as market conditions change or as you get closer to retirement. The nearer you are to retirement, the more inclined you will be to lower your overall risk to the market.
Poor Tax Planning
It may make sense to invest in a Roth 401(k) or Roth IRA if you believe your tax bracket will be higher in retirement than during your working years, as you will pay taxes on the front end and all withdrawals will be tax-free. What’s more, you won’t just pay taxes on your investments, but on all the money those investments have earned will be tax-free as well.
If you think your taxes will be lower in retirement, it may be better to have a traditional IRA or 401(k) because you avoid high taxes on the front end and pay them when you withdraw.
Cashing out Savings
If you cash out your retirement fund before you turn 59 and a half, the government will take out 20% for taxes and penalties, so you won’t get the full amount. You will also lose out on future earnings, as most people never make up for the money they’ve cashed out.
Other issues to watch include:
- Leave less than $5,000 in a company account when changing jobs without specifying treatment, and the plan can open an IRA for you. That can result in high fees that could lower the balance of your savings.
- If you take money out to roll it over to another qualified retirement account, you have 60 days to do so before taxes and penalties kick in.
- Request a direct rollover or trustee-to-trustee transfer to eliminate the 60-day rule.
Underestimating the Impact of Inflation
The purchasing power of your money will be affected by inflation, whether or not it is making headlines. Here’s how to account for the impact of inflation:
- Study up on how to invest when inflation is high and dedicate at least part of your retirement savings to investments that have the potential to grow.
- Look for basic financial strategies that work against inflation. For example, buying a home can lock in your monthly housing cost for decades, inflation be damned. If you pay off your home loan, your expenses can be even lower in retirement.
- Don’t cut it too close. Saving even a little more than you think you’ll need can help you avoid running out of funds when your dollars don’t go as far.
Taking Social Security Early
The amount of your Social Security benefit depends on when you file for it. If you file for it as early as age 62, you will get a lower benefit than if you wait until full retirement age, which is either 66 or 67, depending on your birth year. If you can wait even longer, it may be best to file for Social Security at age 70, when you will receive the highest possible benefit.
The only time it may make sense to file for Social Security as early as possible is if you are in poor health. Another consideration: If spousal benefits are an issue, it may be better to file at full retirement age so that your spouse can also file and receive spousal benefits under your account.
You can begin receiving social security benefits as early as age 62.
The earliest you can start receiving Social Security benefits is at age 62, but your benefits will be reduced if you start receiving them at this age. You will receive full benefits at your retirement age, which is based on the year you were born. Your benefits will increase above the full amount you receive at your retirement age if you wait until you are 70 years old to start receiving them.
These are some common mistakes people make when they retire which can include not planning their finances, not contributing to a retirement plan such as a 401(k), taking money from Social Security too early, not adjusting their investment portfolio to match their willingness to take risks and spending more money than they have.
The Bottom Line
If you’re not on track to having enough saved for retirement, it’s not too late to start taking steps to change that. Try to save more starting now, for example by getting a part-time job and putting that money into your retirement account, or by dedicating any raise or bonus you get to your investment fund.
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