Broker Check
Common Pitfalls in Retirement Planning

Common Pitfalls in Retirement Planning

September 28, 2022
Share |

One must be realistic about future plans and think ahead to avoid retirement mistakes. When preparing for retirement, it is easy to make poor financial moves. No one sets out to sabotage their retirement, but people often make the following mistakes.

  • Quitting a job
  • Not saving for the future
  • Have no financial plan
  • Do not take advantage of a company match
  • Invest unwisely
  • Do not rebalance their portfolio
  • Plan poorly for taxes
  • Cash-out savings
  • Drive up debt
  • Do not plan for health costs
  • Take Social Security early

Weigh the Effects of Leaving a Job

Many people who change jobs do not realize they are leaving money behind through stock options, profit-sharing, or employer contributions to a 401(k) plan. Employees do not have full ownership of stocks or funds until they have been with a company for a set number of years (often five years), Do not leave a job without considering whether the funds left behind are worth a change in employment.

Save for the Future

Every dollar saved now continues to grow until retirement due to compound interest. The longer money accumulates, the better it is. People should think about financially supporting adult children or adding to or remodeling a home they will live in for only a few years. Prioritize saving and cut back on expenses. Experts suggest saving ten to 15 percent of one’s total income for retirement. IRAs and 401(k) plans are excellent means of doing so. 

IRAs

It is never too early to take advantage of a traditional or Roth IRA. Individuals can contribute up to $6000 per year. For those over 50, a catch-up contribution of an additional $1000 is allowed.

401(k)

If a company offers 401(k) benefits, contribute as much as possible. The contributions are made before taxes, reducing your taxable income for the year. Earnings and interest grow tax-free until they are withdrawn. According to the IRS, a person can contribute $20,500 per year. Those over age 50 can make catch-up contributions of $6500. 

Plan for the Future

Before deciding how much money to set aside for retirement, consider the lifestyle you want, your general health, where you plan to live, your planned retirement age, and your expected lifespan when you retire. Create a plan that will prevent running out of money. 

Take advantage of any employer match available. It is typically a percentage of one’s salary. The company match is free money. There is a limit of $61,000 for combined employer and employee contributions per year. That amount increases to $67,500 for people over 50.

Plan for Taxes

If your estimated retirement income will put you in a higher tax bracket, a Roth IRA or Roth 401(k) makes sense. The taxes are paid upfront, and withdrawals are tax-free. You do not pay taxes on the money earned from those investments, either. 

If you believe your taxes after retirement will be lower, a traditional 401(k) or IRA avoids taxes upfront. They are paid when money is withdrawn. Money borrowed from a regular 401(k) may be taxed twice. Borrowed funds must be repaid with after-tax money and again when it is withdrawn in retirement. 

Invest Wisely

Make wise investment decisions, whether a self-directed, Roth, traditional IRA, or company retirement plan. Self-directed IRAs provide more investment options. That is not a bad thing if you do not risk savings on ‘hot tips’ from unreliable sources like suggesting investing in ultra-risky bitcoins.

Self-directed investing usually involves advice from a trusted financial advisor and a steep learning curve. You could wind up paying high fees for poor-performing mutual funds. Low-free index mutual funds or exchange-traded funds are better options for most people. You receive an annual disclosure from a 401(l)-sponsor outlining the fees and their impact on your return. Read it. 

Rebalance Your Portfolio

As you approach retirement or when there is a change in market conditions, your portfolio needs to be rebalanced to maintain the mix of assets you desire. As the day of retirement becomes closer, it is best to scale back on equity exposure and increase bonds in your portfolio.

Do Not Cash Out Savings

When you cash out part or all your retirement funds before you are 59½, the plan sponsor withholds 20 percent for penalties and taxes. You do not receive the total amount, and future earnings are lost because most people fail to catch back up again.

Do Not Drive-Up Debt

Accumulating debt before you retire has a negative effect on savings. You need an emergency fund to avoid withdrawal from retirement savings or last-minute debt. Pay down or pay off debt before retiring. Find a way to save for retirement and address the deficit. 

Plan for Health Costs

A retired couple may need about $300,000 after taxes to cover health care expenses. Staying healthy lowers the figure. Medicare does not pay all the costs of health care. Purchase supplemental insurance to avoid paying the difference out of pocket.  

Wait Until You Are 70 to File for Social Security

The longer one waits to receive Social Security, the higher the benefits will be up to 70 years of age. Benefits are available as early as 62, but you can if you hold out to 70, you receive the maximum benefits. Exceptions to the suggestion are those in poor health or if benefits for a spouse are an issue. 

Takeaway

You likely have made mistakes regardless of where you are on the retirement spectrum. If you have insufficient savings, start now saving more. Invest money in a retirement account or take a part-time job. Dedicate any bonus or raise to investment funds. Get help from a trusted financial advisor to keep you or get you back on track.