Everyone wants to live out their golden years comfortably, especially in the financial sense. To set yourself up for an enjoyable retirement, you have to wisely plan out your retirement savings. Mistakes are easy to make when it comes to saving for retirement, but these mistakes can be extremely costly. Keep reading to stay away from these 5 retirement planning mistakes!
1. Waiting To Start Saving
The earlier you start saving, the more money you can grow in your accounts, thanks to compound interest. Try to cut back on expenses and prioritize putting money toward retirement.
If your company offers a 401(k) match, aim to contribute at least as much as the match is. By not taking advantage of the match, you’re missing out on free money. Also, most 401(k) contributions you can make are with pre-tax dollars, lowering your taxable income. In some 401(k)’s there is an option to make Roth contributions that should be considered based on your earned income. For 2022, you can contribute up to $20,500 into a 401(k) with a $6,500 catch-up contribution for those age 50 and up.
As for IRAs, you can open a traditional or a Roth. They vary in their tax advantages. The maximum contribution for an IRA is $6,000 for 2022. Anyone 50 years old or older is allowed a catch-up contribution of $1,000.
2. Not Planning for Healthcare Expenses
Medicare is the type of health insurance you receive once you turn age 65 if you choose to opt-in. However, Medicare does not cover all of your healthcare costs, so it is important to set money aside for medical expenses. You could also purchase supplemental insurance to cover out-of-pocket healthcare expenses.
3. Not Tax Planning
It’s important to keep taxes in mind when planning for retirement so you aren’t caught off guard by your tax liability. If you think your tax bracket will be higher in retirement than where you’re at currently, a Roth 401(k) or a Roth IRA is a great option for you. With a Roth, you make contributions with after-tax dollars, your investment earnings are not taxed as they grow within the Roth account, and qualified withdrawals are tax-free. There are some instances where you can be penalized for withdrawing earnings from a Roth IRA or Roth 401(k).
If you think you will be in a lower tax bracket in retirement, a traditional IRA or pre-tax 401(k) contributions are great choices to avoid taxes upfront and only pay taxes on withdrawals.
4. Taking Social Security Early
Social Security benefits are one of the best retirement income sources. You can begin receiving Social Security benefits as early as age 62. Typically, taking benefits at full retirement age is in your best interests. Full retirement age ranges from ages 65 to 67 depending on your birth year. The longer you wait to file for Social Security, the higher your benefit will be. If you can, try to hold off until you’re 70 years old to receive your benefits if you believe you will have a life expectancy lasting past age 80.
5. Not Diversifying Your Portfolio
A diversified investment portfolio is key to great retirement savings. By having your investments diversified amongst different asset classes such as stocks, bonds, cash equivalents, and real estate, your retirement portfolio will likely not tank if one industry takes a dip. Having the right mix of assets and industries will build a wonderful retirement portfolio for you.
Retirement planning is key to a successful retirement. If you need assistance preparing for retirement, our advisors at Plan A Wealth Management are happy to help. With our guidance, you avoid the costly mistakes of retirement savings.