10 Worst Retirement Planning Mistakes to Avoid as you await your retirement. Most often, people make mistakes. However, in the case of a retirement mistake, it could come with lots of future consequences.
If you are planning for retirement, it is best that you know these mistakes so that you can avoid making them.
10 Worst Retirement Planning Mistakes to Avoid
Retirement planning is one of the most financial plans for your future. If done properly, you’ll enjoy financial independence when you are old and can no longer work.
However, if done wrongly, it could lead to a lifetime of regret. Hence, you need to know the commonest retirement mistakes people make, learn from them, and take measures to avoid making them.
Below, you will find some of the biggest retirement mistakes to avoid.
Failing to Have a Retirement Plan
This is one of the biggest retirement mistakes that people make. Before you retire, you need to have a plan. When you plan for your retirement as early as you can, you’ll avoid destroying your future and running out of money.
Have you determined how you want your future to be when you retire? Do you know how much cash you’d need when you retire? If not, then you need to have a retirement plan in place right now.
When planning for retirement, put into consideration the time you have till you retire, your retirement location, your health, and the kind of lifestyle you’ll like to lead after you retire. This will help you to know how much you need to set aside. Also, you consult a financial planner to aid you with your retirement plan.
Not Saving Early
This is one of the commonest retirement mistakes people make that often leads to regret. Most people feel that they have a lot of time. Hence, they put off saving for retirement until a later date. However, when you fail to save early for your retirement, you could end up with very little cash after you retire.
This would make it very difficult to pay bills and meet up with paying for expenses. No matter the amount you need for retirement, the earlier you start saving, the more secure you’ll be in the future. Remember that the money you set aside for retirement now will continue to grow over time.
Thanks to compound interest, the longer your savings grow, the more benefit you’ll enjoy. Hence, as early as possible, work towards cutting down your expenses, so that you can start saving for retirement. You can make use of your employer’s sponsored retirement plans or save in an IRA if you are self-employed.
Not Increasing the Amount You Save After a Pay Raise
This is also one mistake people make in retirement planning. If you are saving for retirement and you get a pay increase, it’s best that you also increase your savings. This is because no one knows when a retirement surprise could occur. For instance, a disability or health issue could cause you to stop working before the age you retire.
In such a case, you won’t be able to contribute to that account anymore. However, if your retirement savings are high, you won’t suffer a setback.
Not Picking the Right Investment
When you want to invest in a retirement account, it is very vital that you make the right decision. Everybody has what works for them. Some people could prefer to invest their retirement funds in self-directed IRAs or Roth IRAs. Meanwhile, others could prefer company-sponsored retirement plans or others.
Hence, you need to carefully weigh your options and consider what you feel will be best for you. This is to ensure that you are falling into a risk. If you are having difficulties deciding on a retirement investment choice, then you should contact a trusted financial advisor for help.
Quitting Your Job Earl
Not Planning for Taxes
A lot of people do not put tax implications into consideration when they are planning for retirement. When you are planning to retire, it is important that you consider tax implications based on your financial situation presently and in the future. Ask yourself this question “Is it convenient if I pay all my taxes upfront or when I withdraw my retirement savings?”
If you believe that your taxes will be higher when you retire, then you should consider investing in a Roth IRA or 401(k). This way you’d only pay taxes upfront. This will, when you want to withdraw, you won’t pay taxes even when you want to withdraw the funds.
However, if you believe your taxes will be lower in retirement, investing in a traditional IRA or 401(k) would not be a bad idea. This way, you’d pay the taxes when you withdraw later.
Accumulating Debts
One of the biggest retirement mistakes you could ever make. When you pile up debts till you retire, you’ll end up using all your retirement savings to clear off those debts. This is why everyone should have an emergency fund. This is so that in case of an unforeseen event, you’ll avoid taking cash from your retirement accounts. Rather, you’ll take care of such expenses with cash from your emergency funds account.
Furthermore, if you have any debt, try as much as possible to pay them off or reduce them before you retire. Also, take caution to avoid doing anything that will increase your debt burden.
Not Planning for Health Issues
The aged tend to get ill a lot. If you do not consider your health cost now, you might end up running out of money due to the cost of medical bills. Hence, when you are planning for retirement, you have to include your healthcare.
Firstly, work to keep yourself healthy to lower medical costs. Also, keep in mind that your Medicare insurance won’t cover all your retirement healthcare costs. Hence, you have to purchase additional insurance for your health. Try as much as possible to save enough money for your health costs.
Not Taking Advantage of Your Employer 401(k)
If your employer offers a company-sponsored 401(k) plan, then you should not miss the opportunity to take advantage of it. Employer 401(k) accounts offer matching contributions. This simply means that you won’t be the only one putting money into that account, your employer will also assist in building the funds in that account.
This is basically like free money. By taking advantage of this account, your retirement savings will get an extra boost that will continue to compound.
Cashing out 401(k)s Between Jobs
At any time, a person could decide to leave his/her current employee to work for another. When most people leave their job for another they cash out the funds they have in the 401(k) account. However, this is not the best thing to do.
Foremost, you could be tempted to use the cash and it would be difficult to rebuild the funds when spent. Also, for cashing out, you’ll pay a penalty fee and taxation on the funds. Hence, in the long run, you could end up losing.
Taking Social Security Early
As early as age 62, you could file for social security. However, the longer you wait to start claiming your retirement benefits, the better. Unless you’re having a health issue, it is best if you wait till you are up to or almost age 70.
This is because social security benefits are determined by age. Also, if you claim social security as early as age 62, your monthly check could reduce by about 30% subsequently. However, if you wait to claim social security benefits when you are about age 67 to 70, you’ll enjoy maximum benefits due to delayed retirement credits.
However, you can weigh your options and contact your financial professional if you need guidance on what to do.
FAQs
What is the Biggest Mistake People Often Do in Retirement Planning?
The biggest mistakes people make in retirement planning include
- Taking social security early.
- Withdrawing their retirement savings early.
- Tapping into your Roth before exhausting other options.
- Hiring an advisor who is not a fiduciary.
- Borrowing money against your retirement.
What is the Common Mistake Retirees Make?
The commonest mistake retirees make is not having a financial plan and not contributing to any retirement plan. Also, most people take their social security benefits too early and spend beyond their means.
What are the Five Risks You Could Face When You Retire?
The five challenges an individual could face after retirement are low-interest rates, sequence of returns risks, uncertain government policy, market volatility, and increasing volatility.
What are the Biggest Pitfalls to Retirement Planning?
The three biggest pitfalls to retirement planning are overspending, investing too conservatively, and not digressing from your retirement plan. The good news is that you can avoid them if you are disciplined.
What is the Best Age to Retire?
The best age to retire is between 67 to 70 years. During this age, your social security benefit will increase by about 8% if you haven’t taken it.
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