As more and more baby boomers get closer to retirement age, they start worrying about how they will afford it.
You should ask yourself how prepared you are for retirement, how much money you will need, and if you understand all the details of your pension and retirement accounts.
It is also important to think about when you will want to start claiming Social Security benefits. These are all important things to consider as retirement gets closer. However, you should make sure you are making the right choices long before you actually retire.
We have made a list of the biggest mistakes people make when planning for retirement and how to avoid making them. Take a look to see if any sound familiar to you.
Quitting Your Job
An average worker changes jobs around twelve times during their career, and many times they don’t realize they’re 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 don’t have full ownership of the funds or stock that your employer “matches” until you’ve been employed for a set period of time (usually five years).
Be sure to check your vesting situation before you leave your job, especially if you’re close to the deadline. Think about whether it’s worth leaving the money behind when you make the switch.
Not Saving Now
Compound interest is when you earn interest not only on your original investment, but also on any interest that has already been earned. The longer you have your money invested, the more it can grow through compound interest.
“Spend now, save later” means that you should not spend all of your money now, but rather save some of it for later. This is because the longer you have your money saved, the more it will grow through compound interest.
You should save at least 10% to 25% of your total income for retirement over your working life.
401(k)
If your company offers a 401(k), contribute as much as possible. Contributions are made on a pre-tax basis, which reduces taxable income in the year of the contribution. Additionally, the interest and earnings grow tax-deferred until withdrawn in retirement, at which point you’ll pay income taxes on the distribution amount.
The maximum amount you can contribute to a 401(k) plan is $19,500 for 2021 and $20,500 for 2022, according to the Internal Revenue Service (IRS). If you are aged 50 or over, you can make an additional catch-up contribution of $6,500 for both 2021 and 2022.
IRAs
If your company does not offer a 401(k) retirement savings plan, you can open a traditional individual retirement account (IRA) or a Roth IRA. However, you will have to set aside more money each year to make up for the lack of employer matching funds.
For 2021 and 2022, you can contribute a maximum of $6,000 per year to a traditional or Roth IRA. If you are age 50 or older, you can make an additional “catch-up” contribution of $1,000 per year, for a total of $7,000 per year.
Relocating On a Whim
The idea of moving to a warmer climate is appealing to many people who are nearing retirement. So if you’re considering relocating to Florida or another sunny location, our advice is to try it out before making a permanent change.
If you’re thinking about retiring to a new place, it’s a good idea to visit there first to make sure you like it. This is especially important if you’re considering retiring overseas, where things can be very different from what you’re used to.
Falling for Too-Good-To-Be-True Offers
Hard work, careful planning and decades’ worth of wealth-building are the foundations of financial security in retirement. There are no short cuts. Yet, Americans lose hundreds of millions of dollars a year to get-rich-quick and other scams, according to the FTC, as elder fraud runs rampant.
Planning to Work Indefinitely
Many people who want to keep working beyond retirement age could be setting themselves up for failure, without even knowing it.
More than half of workers expect to have to continue working past age 65 in order to make ends meet, according to the Transamerica Center for Retirement Studies. However, this may not be possible, as only 1 in 5 Americans over the age of 65 are actually employed, according to U.S. Department of Labor statistics.
According to the Transamerica Center for Retirement Studies, there are a number of reasons why you may have to stop working and retire early.
Health problems, either your own or those of a loved one, are a major factor. Other employer-related issues, such as downsizing, layoffs, and buyouts, can also force you to retire early. Another reason older workers may have difficulty finding employment is if they don’t stay up-to-date with their skills.
The best thing to do is to save early and often, in case you are forced into “early retirement”. Only 28% of baby boomers surveyed by Transamerica have a backup plan to replace their income if they can’t continue working.
Not Having a Financial Plan
If you want to make sure you have enough money for retirement and don’t end up penniless, you need to take into account a few factors like how long you’re expected to live, when you want to retire, where you want to retire, your health, and the kind of lifestyle you want to have. Once you have that information, you can better decide how much money to put away.
It is important to regularly update your financial plan as your needs and lifestyle change. It is a good idea to seek the advice of a credentialed financial planner to make sure your financial plan is suitable for you.
Not Maxing out a Company Match
If your company offers a 401(k), sign up and contribute as much money as possible to take advantage of the employer match. The employer match is typically a percentage of your salary. For example, if you contribute 6% of your salary, your employer might match 3%.
The IRS has set a limit on how much money an employer and employee can contribute to a retirement plan. For 2021, the limit is $58,000, or $64,500 for those aged 50 and over with the $6,500 catch-up contribution.
In 2022, the limit is $61,000 or $67,500, including catch-up contributions. If your company has a generous, matching program, it’s free money.
Investing Unwisely
Different people have different preferences for what kind of retirement plan they want. Some people like self-directed IRAs because they feel like they have more investment options. As long as you are careful about not investing in things that are too risky then this can be a smart decision.
Most people find self-directed investing difficult and seek the guidance of a reliable financial advisor. However, paying high fees for actively managed mutual funds which don’t perform well is also unwise.
Claiming Social Security Too Early
You can start taking retirement benefits at 62, but it might be better to wait until you are 67 or 70.
If you plan on claiming your Social Security benefits when you reach your full retirement age, you will receive 100% of your benefit amount. However, if you claim your benefits at 62 years old, your monthly check will be reduced by 30% for the rest of your life.
If you wait to claim your benefits until after your full retirement age, you will receive 8% more in benefits each year between ages 67 and 70. There are no additional retirement credits after you turn 70 years old.
The best claiming strategy may differ for couples, widows and divorced spouses, so it is important to weigh your options and consult a professional if you need help.
Putting Your Kids First
You may want your children to have the best of everything, but this could come at a expense to your retirement savings. It’s important to think about the future and what will be best for all of you.
Even though experts say that you can’t use your 401(k) to help fund your children’s education, there are still other ways that you can explore. Scholarships, grants, and student loans are all options that should be looked into, as well as cheaper in-state schools.
Community college is also a great way to save money for two years before transferring to a four-year college. There are also many ways that you can save money on weddings.
Not Rebalancing Your Portfolio
You should re-balance your asset mix every quarter or year to make sure it still meets your risk tolerance and needs as market conditions fluctuate. The closer you are to retirement, the more conservative you will want your portfolio to be.
Poor Tax Planning
A Roth 401(k) or Roth IRA may make sense if you think your tax bracket will be higher during retirement than while you are working.
With a Roth, you will be investing with money that you’ve already paid taxes on. Plus, all the money those investments have earned can be distributed tax-free, too.
If you think your taxes will be lower in retirement, a traditional IRA or 401(k) is better since you avoid high taxes on the front end and may pay lower taxes on your money when you withdraw.
Buying into a Time-Share
It’s easy to see how someone might want to buy a time-share during retirement. With more free time, you can visit your favorite vacation spots more often. And if you get bored, you can trade for slots at other destinations within the time-share network. Great deal, right? Not always.
Those who don’t fully understand the financial implications of buying a time-share can end up regretting their purchase. In addition to the several thousand dollars paid upfront, maintenance fees typically average over $660 per year.
Special assessments can also be charged for major renovations. Furthermore, there are often travel costs involved if you want to vacation in popular destinations such as Hawaii, Mexico or the Bahamas.
As with any major purchase, go in with your eyes open, do your homework (including any alternatives) and decide what’s best for you.
Ignoring Long-Term Care
Even if we take care of ourselves, we can still get sick as we get older. And, as we age, our bodies and minds will slowly degrade.
The cost of long-term care is increasing every year. A 2019 Genworth survey found that the national median cost of assisted living is $48,612 a year, a 1.28% increase over 2018; a private room in a nursing home, $102,204 a year, a 1.82% increase over 2018.
Even a large retirement savings can be quickly depleted by long-term care costs. And remember, Medicare does not cover most of the costs associated with long-term care.
In Summary
In the United States, you can start receiving Social Security benefits as early as age 62, though the benefits will be reduced. If you wait until your full retirement age, you will receive your full benefits, which is based on the year you were born. The time between your full retirement age and age 70, your benefits will increase by 8% each year. However, once you reach age 70, the only increase you will receive will be based on cost of living adjustments.
The Bottom Line
It’s never too late, or too early, to start planning for retirement. If social security won’t be enough and there’s not a whole lot saved, you will need to make some tough decisions.
Is it possible to lower your monthly expenses? Get rid of any and all debt? Will you need to look at starting a second job or even a side gig? How’s your health? Medicare will not cover everything.
Take a realistic look at everything that’s on your bucket list. Write down what you want your life to look like when you retire.
And remember…
Retirement is not the end of the road,
it is the beginning of a new adventure.
Let me know if you have questions. I’m happy to help!
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