There are lots of mistakes we might make throughout our lifetimes that can cost us and our family some serious money. That’s why financial advisors and other experts are always talking about what you should do to make sure you are positioned to maximize your earnings and avoid the mistakes that will derail your retirement. The Retirement Confidence Survey by the Employee Benefit Research Institute in 2015 points out that only 22% of all American workers feel very confident that they are properly prepared for retirement. It’s important to understand how our financial planning strategies are helping or harming our ability to maximize our retirement savings.
Today, we’ll look at the 8 most common retirement planning mistakes we need to understand and attend to. Have you looked at all of these and put yourself on solid ground towards your goals and successful retirement?
1. You’re Putting Off Retirement Planning
Procrastination is one of the main reasons people fail financially. The longer you delay your plan, the more likely you are to fail. Even delaying just a few years has the potential to cost you hundreds of thousands of dollars. The lesson here is to make your plan now and then take actions like investing in your 401k or a traditional or Roth IRA. Whether your investment is fixed or variable, you want all the years of compounding you can get to maximize your retirement fund.
2. You’re Not Saving Enough for Retirement
It’s one thing to have a plan, and another thing for that plan to succeed. In 2015, 57% of American workers had saved less than $25,000 for retirement. That’s a recipe for financial disaster. If you have an employer plan, contribute as much as possible. Matching funds from an employer are a no brainer. Where else can you get 100% return up front? Make your contributions automatic before you have the opportunity to spend the money. See where you can cut back your budget to save even more and maximize your pre-tax contributions for the year.
3. You Don’t Know How Much Money You Need for Retirement
The survey showed that 52% of American workers have no idea what amount of money they will need to live comfortably in retirement. We often hear that we all will need $1,000,000 when we retire to be sure we don’t become dependent on others or wind up living in a cardboard box! You can use a retirement calculator as a starting point, but the truth is that the amount you need depends on the lifestyle you need to fund and how long you will live. It depends on factors like downsizing your home and autos, your health conditions, the years that you live after you stop working, whether you continue working in some form during retirement, and your Social Security income (remember, you aren’t supposed to live solely on that!). That’s why thinking about all of these variables and more is so important. Planning now for your retirement life will enable you to see your goals and make sure you arrive there when the time comes.
4. You’re Not Choosing the Right Mix of Investments
If you put your money into an inappropriate mix of investments, you can lose out on gains and suffer deep losses. You can see that market investments sometimes fluctuate wildly and are unpredictable at best. The strategy of asset allocation determines 90% of your battle. You want to be appropriately diversified and have a mix of investments that reflects your risk tolerance. Read up and educate yourself about investing, or if you aren’t a market expert yourself, consider seeking out professional advice.
5. You Don’t Have a Tax Reduction Strategy
There have been over 400 tax code changes since the passing of the American Taxpayer Relief Act in 2012 and some of those changes could help you invest more of your money and reduce your taxes. There are some simple ways to reduce your taxes each year, as well as more complex plans you can put into action based on your current and future tax situations. Seeking out professional advice to understand these changes will help you avoid paying higher taxes than you need to and will build wealth more quickly.
6. You Pay Costly Retirement Plan Fees and Penalties
First, the regular fees that your retirement plan costs you can eat away at your retirement savings. There are all sorts of fees that may apply, but if your expenses add up to more than 1%, look around at your options to see if you can lower your costs. The difference compounded over years can add up to an astonishing amount!
Second, the rules and regulations for withdrawing from retirement plans can be complicated and confusing at best. There are penalties and fees for withdrawing from your retirement accounts too early (before age 59½ in most cases) or too late (age 70½). The same is true for not withdrawing enough each year, or too much, pushing you into a higher tax bracket. The penalties can be as high as 50% of the amount involved! If you’re unclear about the rules, consult an advisor here to avoid a big mistake.
These last 2 mistakes are not directly related to retirement, but are essential to a proper financial plan:
7. You Are Avoiding Estate Planning
Without an estate plan, after your passing your wealth could wind up in costly probate litigation, decimated by costly income and estate taxes, and then passed on to unwanted parties. Even worse, your family could suffer delays in receiving their due and financial hardships. And estate planning doesn’t just protect your finances. Having important documents like a living will and/or healthcare power of attorney in case you are unable to make your own decisions is crucial. Although we don’t like to think about our own deaths, proper planning when you’re healthy will make for solid decisions later for your family.
8. You Have Too Much or Too Little Life Insurance
Again, a subject we don’t like to talk about, but life insurance is important as a protection for your family and to take care of funeral expenses and debt you may have when you pass away. However, paying for too much insurance can drain away your investable income. When you are young and independent, you may not need the insurance, but it is when you can obtain it most cheaply provided you are in good health. If marriage and children become a part of the picture, it is essential. This is protection if something happens and your income is lost. This is when you need it the most and can still get it for a reasonable rate. As you age, you can reduce life insurance especially if you own your home outright and have little or no real debt. That can save you money in retirement, but I will say that every case is a little different, so again, seek advice in the various stages of life to get the correct amount and type of coverage.
You should start reviewing your own situation now, even if retirement is many years off. Time is a friend if you take advantage of proper planning and revise your plan as you go along. Make sure to avoid these 8 costly mistakes and you should be on your way to a bright retirement future.
Where do you stand on planning for your retirement?
Image courtesy of 401kCalculator.org (with changes)