Top 12 Retirement Mistakes to Avoid

retirement mistakes to avoid

The Federal Reserve reports that 60 percent of working adults do not believe they're on track with their retirement savings, while 25 percent of working adults have no retirement savings at all.

Without proper retirement savings, however, you could be forced to live a much lower quality of life than you're accustomed to living and, in the worst of cases, not be able to take care of yourself in an emergency, let alone cover your daily needs.

By avoiding these retirement mistakes you can place yourself among the elite 40 percent of working adults who feel properly prepared for retirement. 

 

1. Failing to Have a Financial Plan

To have the retirement you want to have, you need to know well ahead of time how you want it to look. Without this key bit of knowledge, you have no way of knowing how much you need to support that vision and, therefore, how to make sure you have it when you’ll need it. 

In short, you need to plan for retirement. You can’t just let it happen willy-nilly and hope it’ll all work out.

Do that, and you’re liable to find yourself in a less-than-desirable living situation with no clue how you got there or how to get out of it. Don’t wait until cashing your final paycheck to think about retirement.

Instead, start asking yourself some pivotal questions:

  • Where do you want to live?
  • How do you want to spend your time?
  • How much longer do you want to keep working?

Next, put together an estimated budget for your retirement, looking at how much income you’ll be bringing in vs. how much it will cost to live the retirement you envision.

Don’t forget to include in these calculations whatever Social Security benefits, pensions, and other retirement benefits you’ll receive. 

If it doesn’t balance out perfectly–which it probably won’t–your next mission is to figure out where you can trim expenses and how you can increase your retirement income.

Make sure to account for the inevitable unknown variables too, like if you’ll need to hold off on retirement or whether an emergency medical issue impacts your ability to work as long as you’d planned.

 

2. Failing to Start Saving Now

It takes time to accrue sufficient retirement savings. You need to start as soon as possible, so the money you put away can start growing and compounding. Otherwise, you won’t even outpace inflation. (More on both compounding and inflation later.)

By starting to plan for retirement early, you have more time to sock away funds, pay into Social Security or start a second career or a new business.

 

The best time to start saving for retirement has already passed; the second-best time is now.

 

Establish Long-term Goals

To do this most easily and effectively, start establishing some solid, long-term goals. Determine how much you can realistically save per month (or some other period) and, given that, how long it would take you to save the amount you need.

Of course, none of this accounts for the fact that your money will–hopefully–grow while you’re saving it up for retirement. By starting early, you can capitalize on the benefit of compounding to help your money grow in nearly any economic condition.

 

What is Compounding?

Essentially, compounding means that, as your savings earn interest and dividends, those savings grow, thereby increasing the amount of money earning interest and dividends and, thus, the amount of that interest and those dividends and so on that way in a self-feeding cycle.

The earlier you start saving, the more you can benefit from the act of compounding. 

 

3. Leaving Benefits on the Table

As the Bureau of Labor Statistics reports, more than two-thirds of employees in the private sector have access through their employers to retirement benefits, yet only just over half participate. 

If your employee compensation package includes retirement benefits, take advantage of them. Not only do they help you automatically save for retirement without having to think about it, but they can also significantly reduce the size of your tax bill each year. Over enough time, that can grow into a sizable retirement pool.

To make sure you don’t leave any employee benefits on the table, receive the full employer match on your 403(b) or 401(k) contributions. This can give you a huge jump start on your retirement savings, essentially doubling it from the get-go. You won’t likely find a better return on investment than that. 

 

4. Leaving Your Job

Avoid quitting any job before you review the status of your retirement package, be it a pension, stock options, profit-sharing, or a 401(k). Some companies require you to work for a particular duration of time before you fully own your benefits.

If you haven’t been at your job long enough for your retirement funds to be properly vested, you may want to postpone your retirement until they can be.

And, when you do finally leave, remember to take those retirement funds with you. You can move them into a rollover IRA while you move forward and figure out this next phase of your retirement planning.

 

5. Investing Unwisely

Avoid fad investments. Instead, consult with an advisor who can help you develop a diversified portfolio that balances risk and reward with your retirement needs and goals.

Then, stick to your strategy, even if that means shifting allocations. Making investment decisions based on emotion, however, like selling at the bottom of downtown, is one of the most common retirement mistakes to avoid.

 

6. Inadequate Tax Planning

The IRS wants you to save for retirement; that’s why they offer so many benefits to those who take the initiative to do it. So, don’t fritter away the chance this gives you to lower your tax bills while saving more for retirement.

Remember as well to account in your retirement budget for taxes you may have to pay after you retire.

Take advantage of all tax-deferred retirement plans for which you’re eligible, like individual IRAs and 401(k) accounts.

Any contributions you make to these accounts you can deduct from your taxable income for the year, and you won’t need to pay taxes on that money while it grows in the accounts. (Note that you will, however, be charged income taxes on the amounts you withdraw once you retire.)

If you’re 50 or older, remember that you can make catch-up contributions to these accounts that will also be tax deductible.

You could also consider a tax-beneficial retirement account like a Roth IRA. Here, you pay taxes on the money you place into the account the year that you earn it. Then, you pay no taxes on the growth in that money or the funds you withdraw from the account in retirement. 

 

7. Raiding Your Savings

If you see a sizable sum of money sitting unused in a retirement account, the temptation could arise to spend it on a current want or need instead. Prepare yourself ahead of time to resist that temptation.

Not only would you defeat your purposes by spending retirement savings for pre-retirement expenditures, but you will probably cause yourself to incur a huge tax bill on income earned in tax-deferred accounts and, if you’re younger than 59½ when making that withdrawal, a 10-percent penalty on those earnings.

 

Make sure you speak with your tax advisor before taking any money out of a retirement account to be sure you know how much you’ll be paying in taxes as a result of that. 

 

If you must have certain funds available, consider taking out a home equity loan or a personal loan instead. While you will have to pay interest on that loan, you won’t have to pay income taxes on it and your retirement savings remain untouched.

You must also start saving now, avoid leaving your job prematurely, take advantage of all job benefits you have available to you, and leave your savings alone. You must always invest with an advisor and use a tax advisor to help you plan for, prepare and file your taxes. You

 

8. Racking Up Debt

Keeping your debt minimal and your credit at its best is helpful before and after you retire alike.

Lowering your balances helps keep your expenses low while keeping track of your credit and taking actions to improve it can help you pave the way for good terms and rates on credit down the line should it become necessary. 

 

9. Ignoring Health Care Costs

It can be hard to know precisely what medical needs you’ll have during retirement, but you can certainly start by planning for certain likely expenses, such as:

  • Insurance premiums for coverage beyond Medicare
  • Uncovered prescription costs
  • Vision and dental care

You also want to save some for potential long-term care if you become injured, ill, or require aid with everyday living.

To make sure you consider as much of your potential healthcare costs in retirement as possible, estimate how much Medicare will cost as well as supplemental insurance; then, factor these into your retirement-planning budget.

In addition, account for long-term insurance, or simply plan to save enough money to pay for your long-term care if you should ever require it; either way, you’ll need to consider how much that’ll cost you and factor those costs into your savings plan.

 

10. Not Considering Inflation

If you place your money in a drawer and leave it there until retirement, you’ll have the same amount of money to pull out of the drawer as what you’d put into it. However, that money will not be worth as much, because inflation will have eaten away its value like moths eating holes in your clothes. 

 

Even in years when inflation isn’t the top story on all the news shows, it still occurs–just at a more measured pace.

 

This means, to make sure the money you save for retirement at the bare minimum maintains its value, you must save it in some way that at least keeps pace with inflation.

To do this, devote at least a portion of your savings to investments with the possibility of growth over time. Speak with a financial advisor about ways to invest and diversify your investments that hedge against inflation, such as buying or selling a home. 

You can also help to protect yourself against inflation by saving a bit more than you think you need to save, just so you can keep from running out of money when you’re unable to stretch the money you have as far as you need. 

 

11. Underestimating Retirement Needs

One of the most common retirement mistakes to avoid today is failing to fully account for all your potential retirement needs.

People these days are living longer and longer, which means it’s becoming more and more common for people planning for retirement to underestimate how long they will live and, therefore, how much money they will need in retirement.

 

12. Poor Personal Financial Management

How you manage your finances today can provide the clearest window into how you will likely manage your finances after retirement. To give yourself a good retirement then, start building good personal finance habits today. 

Learn how to budget, and be sure to factor regular retirement savings into it. Improve your credit. And, speak with a financial advisor about other ways you can better manage your money and ensure your financial health now and into retirement. 

 

Recap

You can plan for a perfect retirement free of financial stress by simply avoiding some common retirement mistakes. At the top of this list is failing to plan for retirement at all. To avoid this risk, pay your credit card and consumer debt balances down as much as you can before retiring.

Only use a credit card if you can pay the balance off in full each month. Find ways to pay off any car loans, mortgages, or other big debts before retirement where possible. And, don't rack up debt or forget about your possible healthcare expenses, the influence of inflation, or the importance of diligent financial planning.

For help with all this, including free financial planning, counseling, and calculators to help you with the best plan for your retirement, visit us at 121 Financial Credit Union today.

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