Retirement planning mistakes could mean you retire without the money you need or you end up working longer than you need to do so. No matter what your goals and expectations are, the sooner you take on the task of planning for retirement, the more opportunities there are for you to build the retirement accounts you need and can rely on for decades to come.
The problem is that there are numerous common retirement mistakes people make that could end up costing them in the long term. The good news is that there’s often time to catch up by making a few changes.
With Invested Better, you can get matched with financial advisors who can help you avoid these retirement planning mistakes. Just answer a few questions and get matched with a professional.
Why Planning Now Leads to a Secure Retirement Later
You do not want to run out of money during retirement. It is never too early or too late to start planning for retirement.
Here are some key benefits to starting that retirement savings now and working with a financial advisor now instead of later.
- The sooner you start investing, the less you need to put into your retirement savings accounts. That’s thanks to compound interest that builds on itself over time, helping to grow your savings larger.
- If you start investing now, you gain more opportunities to reduce your overall taxable income during your working years. That means you may save money on taxes now.
- If you have access to an employer-sponsored retirement plan, like a 401(k), as well as an employer match, the sooner you start those accounts, the more money your employer is putting into your retirement at no cost to you.
The benefits are clear: the sooner you start planning for retirement, the more opportunity you have to build the type of retirement nest egg you desire, the more streams of income available to you, potentially during retirement, and the more benefit to your life right now.
If you haven’t done so yet, now is the time to start working with a financial planner who can help you create an investment plan and portfolio that helps you achieve your specific goals. You can get matched with a financial advisor right now with our help and create a plan that fits your life now.
9 Most Common Mistakes to Avoid When Planning for Retirement
The following are some of the most common retirement planning mistakes, mistakes people often make because they do not know there are alternatives that are more beneficial. It is hard to plan for retirement, especially when life creates complications along the way. Work to avoid these mistakes with your retirement planning and you could see financial benefits for years to come.
- Underestimating Retirement Costs (Including Inflation)
This is a very common mistake. Many people believe they will retire with no debt and with Social Security benefits that cover their retirement income. However, that is not reality. As you approach retirement, your life may not be as neatly planned from a financial vantage point as you thought. Some of the most common retirement costs you may be forgetting to plan for you include:
- Inflation: When you plan for inflation, you are able to maintain the same living standard you have now after retirement. Many financial advisors encourage investors to plan for at least 2.5% inflation year-to-year, but that could rise to 5% or more.
- Healthcare costs: Without a doubt, healthcare costs are hard to plan for, and often, many people think they can rely on Social Security benefits and Medicare. However, that is not reality.
- Long term care needs: Another big mistake is not considering the risk of needing long term medical care, such as nursing home or medical assistance later in life. Long term care is expensive in every situation, and not often covered by Medicare.
You also need to consider how much savings you need for the lifestyle you plan to live. Do you want to travel, spoil the grandkids, contribute to charities, or otherwise spend during your retirement years? You need to consider those expenses as well.
- Not Saving Enough Early On
The sooner you start saving for retirement, the better. It is not uncommon for people to put off retirement planning because they have debt or other financial objectives. While that may be the case, and sometimes equally important, the sooner you start saving for retirement, the better.
- Compounding interest allows your investments to grow in value faster. That simply means that the interest you earn in one month can help to build interest in the next. Time is a powerful investment tool.
- Saving more money now means you need to contribute less over the long term. While investing 10% of your income now into retirement may sting a bit, you’ll be putting in less now over the long term than if you had to contribute significantly larger percentages of your income when you are 20 years older.
- You miss tax advantages now. Remember that some types of investments allow you to reduce your taxable income now, and that means more money in your pocket throughout your lifetime.
- Ignoring Employer Matching Programs
If you take advantage of employer matching programs, you’re tapping into more earnings – without paying anything more in taxes or getting a raise. Employer matches are one of the simplest ways to increase how much you are saving for retirement year after year.
If you have access to an employer-sponsored retirement account, such as a 401(k) plan, your employer may match a certain percentage of your contributions. If they match 50%, for example, that means if you add in $100 from each paycheck into your retirement account, the employer matches that with another $50. Some employer matches reach 100%.
This is a contribution to your retirement that does not impact your current budget. In most cases, it is one of the best ways to boost your funds in your retirement account if you have an account like this. If you are an employee and an employer does not offer this type of benefit, it may be time to ask for one.
- Not Planning for Potential Long-Term Care Needs
This was mentioned previously but it warrants it’s own discussion because of how complex long term care needs are. The Administration for Community Living shares that, about 70% of those who are turning 65 today will need some form of long term care services and support during the rest of their lifetime.
Ignoring long-term care needs is a costly mistake. Social Security does not outright pay for long-term care, such as nursing home care unless a person qualifies for Medicaid. To do that, you must be financially independent and without assets to qualify. In most cases, you do not want that to happen. By the time you are retiring, though, long-term care costs may be too high to meet.
With the help of your financial advisor now, you may be able to purchase long-term care insurance or save money to avoid having to go without the care you need.
- Relying Solely on Social Security
Though the Social Security Administration was designed to provide for the financial needs of retirees, even if you worked for decades and contributed, your Social Security benefits may not meet your specific needs during retirement.
Data shared by the Wall Street Journal indicates that 1 in 7 people 65 years of age or older rely solely on Social Security benefits for their retirement income. This nearly always leads to being unable to maintain the lifestyle they had during their working years. Key reasons for this may include:
- Having more expenses than expected when you enter retirement
- Having benefits that are under the cost of living in your area
- Retirees who enter retirement with a mortgage or other loans
- Not planning for medical costs that tap into your budget
- Expecting to have enough from Social Security to meet inflationary needs.
If you are currently relying on Social Security for your sole income during retirement, it may be time to find a financial advisor who can help you. You can use our free advisor match tool to help you with this process, and that means taking advantage of their experience and know-how to maximize your benefits.
- Withdrawing from Retirement Accounts Too Early
Contributions to some types of retirement accounts, such as a traditional IRA (Individual Retirement Accounts) and 401(k)s, are meant to remain in place until you reach your full retirement age. If you withdraw funds from your retirement account before that period, you may have to pay taxes on it. However, you also will pay a 10% penalty, which is an extensive loss.
If you need to use some of the money in the account, you may be able to take advantage of a loan from the lender. Loans are still expensive, charging you an interest rate, but they can help you avoid the penalty for accessing your money before a certain age.
- Not Considering Longevity Risk
How long will you live? While there may not be any way of knowing this, if you do not plan to live a long life, you could run out of money early.
As you consider contributions to your retirement accounts, you may also want to think about the length of your lifetime. As noted earlier, you could live until you are 80, 90, or more. If you do not have retirement savings to cover those longer-term costs, that could make the future more difficult.
- Failing to Diversify Investments
When it comes to investing, you should work with your retirement savings advisor to create a diversified portfolio. That means you are not counting on just one or two types of investments; you have numerous types of investments. By investing like this, you spread out more of your risk (if one type of investment does poorly for a few years, you are still building value in your portfolio through others).
- Ignoring Tax Implications
Taxes can affect your retirement savings. As noted, that penalty on an early distribution is one of the biggest risks to your retirement accounts. However, there are other potential tax consequences to consider. Work closely with your financial advisor to clarify any type of tax that could impact you, including capital gains from selling your home or taxes you may face in the future based on your retirement income.
Tips to Optimize Your Retirement Planning
The following tips can help you make the most out of your retirement planning, tax law, and how you receive benefits from Social Security.
Step 1. Create a Retirement Budget Plan
It does not have to be perfect, but having a budget can help retirees soon to have the money they need to pay their expenses and meet their needs. It can also help protect your nest egg.
Step 2. Automate Your Savings
Employees can automate all contributions to retirement accounts. If you have an IRA, you are investing outside of your employer, so set up automatic payments from your paycheck into your account. That helps you save as a priority.
Step 3. Seek Guidance from a Financial Advisor
Even if you have a 401(k), an emergency fund, and a solid income, you will benefit from hiring a financial advisor to help you both build your nest egg and maintain it year after year. Your employer can help you choose the right type of account, whether it’s a traditional IRA or a Roth IRA. They may be able to help you plan for long-term medical care needs. That way, you don’t have to worry about a part-time job when you want to enjoy your retirement.
Avoid these retirement planning mistakes by finding a professional to help you. You can use our tools to help you find a financial advisor who can guide you in making the right decisions for your future.
