Everyone makes mistakes, but when it comes to retirement planning, many mistakes can be avoided. These mistakes can be extremely costly and ruin years, even decades, of work you’ve put into saving for retirement. Below are 7 retirement planning mistakes you should consider avoiding.
1. Waiting to Save
All retirement savings accounts thrive off compound interest. Your savings will grow over time as the earnings build on top of one another. The key to retirement saving is time; time is compound interest’s best friend. To greatly benefit from compound interest, you need to prioritize saving for retirement throughout your life. Even if you only put away $100 a month, you will be better off in the long run. If you are only planning on using the income from Social Security in retirement for your income needs, it may not be prudent to count on that since that benefit is not guaranteed to be there when you retire. Be sure to make it a point to contribute to your retirement savings each month to take advantage of compound interest.
2. Not Taking Advantage of Company Matching
If you have access to an employer-sponsored 401(k) plan, your company may offer matching. Employer matching is where your company matches up to a certain percentage of your salary to contribute to your 401(k) based on your contributions. For example, you may contribute 5% of your salary to your 401(k) and your employer would match 3% of your salary. It’s extremely important to take advantage of employer match; it’s essentially free money! The more money in your 401(k), the more retirement savings, and the more savings that can grow with compound interest.
3. Investing Poorly
No matter what retirement account you utilize, you need to make smart investing choices. If you do not know much about investments and do not prefer to learn about investments, it’s usually not wise to choose a self-directed retirement fund. Instead, choosing a retirement date fund may be more appropriate. With these types of funds, the investment choices are made for you by a fund manager.
4. Not Considering Health Care Costs or Long-Term Care
While you may already be saving money to live off in your golden years, you may not have considered the health care costs you will incur. Fidelity estimates the average 65-year-old couple in retirement in 2022 will spend $315,000 on health care in retirement. You don’t want to have to use your other retirement savings on health care costs. Instead, prepare for medical costs separately with a Health Savings Account, supplemental insurance, or long-term care insurance.
5. Taking Social Security Early
Social Security benefits are a great way to boost your income in retirement. However, you should consider avoiding applying for Social Security benefits prior to reaching your full retirement age. You can begin taking Social Security benefits at age 62, but your benefits can be up to 30% less than if you waited until your full retirement age. Additionally, if you delay taking Social Security benefits until age 70, your benefits could be up to 32% higher than at your full retirement age.
6. Not Planning for Taxes
Your retirement savings and planning need to be included in your current tax planning strategies. If you think you will be in a higher tax bracket in retirement than you are now, you should consider utilizing a Roth IRA or Roth 401(k) since you will not pay taxes on the withdrawals. Some exceptions may apply. If you think your tax bracket will be lower in retirement, you should consider using a 401(k) or traditional IRA to take the tax advantage now.
7. Leaving Your Portfolio be
Every quarter or every year you should consider rebalancing your portfolio. Rebalancing allows you to evaluate your asset classes of investments and the market conditions to make sure you are investing the way you want to be. As you get closer to retirement, you may want to lower your risk to keep your nest egg intact.
These 7 retirement planning mistakes can cause you many setbacks when trying to save for retirement. A knowledgeable and experienced financial advisor can help you build a retirement savings plan and help guide you on the right path. Our advisors at Plan A Wealth Management are here to help. Schedule a consultation with us today to get started.