To avoid the worst retirement mistakes, you have to be realistic about your future plans and think
In the future. Unfortunately, it is very easy to take the wrong financial steps when preparing for retirement. According to the Fed, 37% of non-retired adults believe that their retirement savings are on track. But none of the 44% who said their savings were not on track – or the remaining 19% unsure – were likely to ruin their retirement.
Start (or complete) your journey by avoiding these 11 financial errors.
The main astounding
If you think your retirement savings are not on track, make changes while you work and make a financial plan.
Save as much as you can by contributing to IRAs, or 401 (k), and if your employer offers a match of 401 (k), take advantage of it.
Invest wisely and find a trusted financial advisor to help with investment options and keep your portfolio balanced.
Keep taxes and penalties in mind if you are considering withdrawing funds from your retirement accounts.
Plan for health care costs in retirement, debt repayment, and social security delay until the age of 70 to help maximize your benefits.
- Quit Your Job
The average worker changes his or her job about a dozen times during his career. Many do this without realizing that they are leaving money on the table in the form of employer contributions to the 401 (k) plan, profit-sharing, or stock options. It’s all about entitlement, which means you don’t have full ownership of the funds or shares that your employer “matches” until you are assigned for a specified period (often five years).
Do not decide to leave without knowing your eligibility status, especially if you are close to the deadline. Keep in mind whether leaving this money on the table is worth changing the job.
- Don’t Save Now
Thanks to compound interest, every dollar you save will continue to grow until you retire. There is no better friend than time to accumulate interest. The longer your money accumulates, the better. Examples of spending now include, later saving to redesign or add a home where you will only live for a few years or support adult children financially. (Remember that they have more time to recover from you.)
Reducing expenses and prioritizing savings. Most experts suggest that at least 10% to 15% of total income should go into retirement savings during your working life. 2
If your company offers a 401 (k), try contributing as much as you can. Any contributions are made on a pre-tax basis, which means they reduce your taxable income in the year of your contribution. Also, interest and profits grow tax-free until you withdraw money in retirement, in which case, income taxes will be paid on the distribution amount.
According to the Internal Revenue Service (IRS), you can contribute a maximum of $19,500 per year in 401 (k) for 2020 and 2021. If you are 50 years of age or older, you can make an additional compensation contribution of $6,500 for both 2020 and 2021. 3
If there is no 401 (k), take out traditionally or Roth IRA, but realize that you will have to save more because you don’t get matching money from your employer. You can contribute up to a maximum of $6,000 per year (total) to Roth IRA for 2020 and 2021. For individuals over the age of 50, they can make a compensation contribution of $1,000 for a total of $7,000 per year. 3
- Lack of financial plan
To avoid ruining your retirement and running out of money, create a plan that takes into account life expectancy, planned retirement age, retirement location, public health, and lifestyle you want to lead before deciding how much you will allocate.
Update your plan regularly to your needs and change your lifestyle. Seek the advice of an approved financial planner to make sure your plan makes sense to you.
- Not out of a company match
If your company offers 401 (k), register and increase the amount you contribute to take advantage of the full employer match if available. Matching is usually a percentage of your salary. For example, if you contribute 6% of your salary, your employer may match 3%.
If your company has a generous matching program, it is free money. The IRS has set a maximum amount of total contributions to the employee’s retirement plan from both the employee and the employer. In 2020, total contributions cannot exceed $57,000 – or $63,500 for those aged 50 and over with a compensation contribution of $6,500. In 2021, the maximum contribution is $58,000 or $64,500, including compensation contributions. 4
- Unwise Investment
Whether it’s a company’s retirement plan, a traditional IRA, a Roth, or a self-guided IRA, make smart investment decisions. Some people prefer a self-directed IRA because it gives them more investment options. This is not a bad decision, provided you don’t risk your savings by investing in “quick tips” from unreliable sources, such as investing everything in Bitcoin or other high-risk options.
For most people, self-directed investment involves a steep learning curve and the advice of a trusted financial advisor. Paying high fees to poorly performing and actively managed mutual funds is another unwise investment step.
And don’t go down this path unless you’re really ready to direct that self-directed IRA, by making sure that your investment choices remain right. For most people, better options include low-fee exchange-traded funds (ETFs) or index mutual funds. The sponsor of plan 401 (k) is required to send you an annual statement explaining the disclosure fees and the impact of these fees on your return. 5 Make sure you read it.
- Don’t rebalance your wallet
Rebalance your portfolio quarterly or quarterly to maintain the mix of assets you want as market conditions change or retirement approaches. The closer you get to your last working day, the more likely you want to reduce your exposure to stocks as the percentage of bonds in your portfolio increases.
- Poor tax planning
If you think your tax bracket will be higher in retirement than during your years of work, it may make sense to invest in Roth 401 (k) or Roth IRA, where you will pay taxes on the front end and all tax withdrawals will be free. (What’s more, you won’t pay taxes not only on your investments, but on all the money these investments have made.) 6 7
On the other hand, if you think your taxes will be lower in retirement, the traditional IRA or 401 (k) is better because you avoid high taxes on the front end and pay them when you withdraw. 6 Getting a loan from your regular 401 (k) may result in double tax on borrowed funds as you must repay the loan in after tax dollars and your withdrawals will be taxed in retirement. 8
- Spending savings
If you withdraw all or part of your pension fund before the age of 591/2, your sponsor will withhold 20% of fines and taxes so you don’t receive the full amount. 9 You will lose profits in the future because most people never follow you.
Other issues to monitor include:
Leave less than $5,000 in a company account when changing jobs without specifying treatment, and the plan can open an IRA account for you. It could lead to
Too high fees can reduce your savings balance. 10
If you withdraw funds to transfer them to another eligible retirement account, you have 60 days to do so before starting taxes and penalties. Request a direct transfer or transfer from guardian to guardian to cancel the 60-day rule. 9
To help cover your retirement health care costs, increase your savings in tax concession accounts such as the Health Savings Account (HSA), which allows you to pay for eligible health care without retirement tax. 11
- Increasing debt
Increasing debt before retirement can have a negative impact on your savings. Get an emergency fund to avoid last minute debts or withdraw your retirement savings. Repayment of debts (or at least repayment) before retirement. On the other hand, experts warn that you should not stop saving for retirement to pay off debts. Find a way to do both.
- Failure to plan for health costs
According to Fidelity, the average couple will spend $285,000 on health care in retirement (not counting long-term care). 12 Keep your health to reduce this figure. Keep in mind that Medicare only covers about 80% of health care costs for retirement. 13 Plans to buy supplementary insurance or be prepared to pay the difference out of pocket.
- Taking Social Security Early
The longer you wait to apply for social security, the higher your allowance (up to age 70). You can apply as early as age 62, but full retirement occurs at age 66 or 67, depending on your birth year. If you can postpone, it is best to wait until the age of 70 to apply for maximum benefits. 14
The only time it doesn’t make sense is if you’re in poor health. Another consideration: If marital benefits are a problem, it may be better to apply at full retirement age so that the spouse can also submit and receive the benefits within your account. 14
No matter where you are in the retirement chain, it is likely that you have made mistakes along the way. If you don’t have enough savings, try saving more starting now. Get a part-time job and put these funds into your retirement account. Allocate any increase or bonus to your investment fund.
In addition to avoiding the areas of problems mentioned above, seek advice from a trusted financial advisor to help you stay – or get back on track – on the right track.