Retirement planning is no easy task. Not only do factors like salary, debt and expenses all affect your ability to save, but there’s also no one-size-fits-all solution to realizing the vision of your golden years.
Generally, the right plan is about timing, opportunity and not following the myths that can destroy your retirement. With that in mind, here are some retirement-planning errors to avoid, along with tips for correcting them.
Last updated: June 7, 2021
Not starting the retirement-planning process is one of the biggest retirement mistakes you can make. You should determine what you want your future to look like, as well as how much money you can realistically set aside. Then, find a plan that will get you there.
Some employers offer 401(k) plans and pensions, though the latter are becoming less common. You can also open an IRA without an employer sponsoring the account. These products, which can offer greater returns and more diversification than a traditional deposit account, are effective ways to start growing your nest egg.
If you’re nearing retirement, take a look at your current salary, add up your expenses — including medical costs in retirement — and meet with a financial planner to calculate how much you’ll need in order to retire and live comfortably.
If you’re decades away from retirement, come up with a savings rate to determine how much you should deduct from your paycheck each month to put in your retirement savings account.
A retirement savings rate is the amount of money you deduct from your paycheck to put toward retirement. For example, if you deduct $200 every month from your $30,000 salary, your retirement savings rate is 8%.
You should always increase your savings rate as your salary increases. Put 100% of your raise toward retirement — you know you can already get by on your current salary.
If your employer offers to match your 401(k) contributions to a certain percentage and you don’t opt in, you’re leaving free money on the table. Make sure to contribute at least the amount your employer matches each month.
In the event of your passing, you don’t want to leave a financial mess behind for your family. Avoid this problem by making sure your retirement plan beneficiaries and the designations listed in your will are in agreement. That way, your loved ones won’t have to struggle over dividing up your assets.
Be aware of how much you’re paying in investment fees, including 401(k) fees. In 2014, the Center for American Progress estimated that a typical worker who starts saving at age 25, earns $30,502 and pays a 1% investment fee will end up spending nearly $140,000 in fees over his lifetime. A high-income worker making $75,000 at 25 years old will pay more than $340,000 in investment fees.
The promise of high yields is tantalizing, but compare these account fees with ones attached to lower-yield options to determine the true value of your investment. Watch out for the hidden fees you’ll encounter in retirement.
Resting on your laurels does not bode well for a strong retirement plan. Do you know how well your investments performed last year or over the past five years? Unless retirement is imminent, long-term performance should dictate which funds you invest in.
Social Security can provide some financial security, but you shouldn’t rely only on your Social Security checks to fund your retirement. Social Security benefits represent about 39% of elderly people’s income, according to the Social Security Administration. Trying to retire only on Social Security has a lot of hidden costs and risks.
According to Fidelity Investments, the average cash-out amount of a person under 40 who is changing jobs is $14,300. Although cashing out your 401(k) might seem like a good idea if you need to solve a short-term financial crisis, doing so can have dire consequences.
For example, if you cash out or withdraw money from your 401(k) early — before age 59 1/2 — you could be hit with tax penalties. Along with any applicable federal and state income taxes, you could face a 10% early withdrawal penalty. Moreover, Fidelity reports that your 401(k) plan administrator will typically withhold 20% of your balance to cover the taxes. Opting to roll over your 401(k) is a much better option.
You might love your career and be unable to imagine life without a 9-to-5 gig, but the odds are that your ability to keep pace in the workplace will wane eventually. Don’t skimp on your saving because you think you can work until you’re 90, and see if you’re one of those people who will never retire.
Although you can work full time or part time during your golden years, you might find that this option isn’t realistic. Your health could deteriorate, or you might just decide you’d rather travel or spend time with the grandkids.
For best results, build a hefty retirement nest egg in case you realize working during retirement is not the ideal option.
Just like you shouldn’t assume you’ll keep working during retirement, you also shouldn’t assume that you’ll never work. Many retirees find themselves taking up full-time or part-time jobs in retirement to supplement their retirement income and stay active.
If you see yourself getting bored in retirement or think you’ll have a hard time meeting your financial obligations, consider the possibility of working. There are lots of great part-time jobs with flexible hours for retirees.
Instead of using a traditional savings account to save for retirement, you should be using a retirement account that offers tax benefits, such as a traditional IRA, Roth IRA or 401(k).
These retirement accounts can also help you save on taxes, so take advantage of them now.
14. Having Incorrect Transfer-on-Death and Payable-on-Death Designations
If you have a trust or estate plan, Fidelity recommends double-checking your transfer-on-death (TOD) and payable-on-death (POD) designations to ensure they match your will.
"Some people might not realize that a TOD- or POD-titled asset overrides whatever is stated in a will," reports Fidelity.
Your financial advisor might try to convince you to cash out your pension from a former employer. Unless you really need the money now, this is mostly in the interest of your advisor, who could make tens of thousands in commission, according to Time Money.
According to the Pension Rights Center, you should consider a one-time, lump-sum payment from your employer if you’re sick, your life expectancy is short or you don’t have a surviving spouse that will need to rely on lifetime income. But generally, try to avoid cashing out your pension.
It’s unlikely that your employer is the next Enron, but you can’t rule out that possibility. For best results, don’t put more than 10% of your investments in company stock. Use tools to keep your portfolio diversified.
Whether you’re investing in the stock market through a 401(k) or independently with the help of a financial advisor, make sure you’re making the right investments based on your risk profile. That way, your retirement portfolio can survive through stock market fluctuations and volatility.
Your retirement portfolio should include a healthy mix of stocks and bonds — including short-term, long-term, large-cap, mid-cap, small-cap and international — and even cash investments. Review your investments and allocate assets as needed to diversify your retirement portfolio.
If you saved a lot for retirement, it might feel like the ultimate payoff to stop working and gain access to your funds. Don’t let all that cash fool you into living the high life early on in retirement, though.
Sure, the first years of retirement might be the best time to travel, do home projects and spend money on things you might not be able to enjoy later on. But it’s important to spend your retirement savings modestly, as you don’t know how long you’ll need those funds to last.
If your hope is to have some money left over for your children or beneficiaries to inherit, then you’ll want to pay attention to your trusts. Note that designating a trust as the beneficiary of a retirement account could be useless if your wishes aren’t drafted appropriately.
20. Retiring Too Early
Retiring early has two main disadvantages. First, the earlier you retire, the less time you have to save for retirement.
The second disadvantage has to do with your Social Security payouts. Although you can retire as early as 62 and start receiving Social Security benefits, your age dictates the size of your payout. For example, if your full retirement age is 67 and you start your retirement benefits at 62, prepare for your monthly benefit amount to be reduced by about 30%.
21. Investing Too Conservatively
The Great Recession might have scared you away from riskier investments. But if you’re decades from retirement, don’t be too conservative with your funds — especially if your options could give you high returns over a long period.
You don’t want to miss out on the best returns when investing, but you also don’t want to open yourself up to too much risk, especially in the years leading up to retirement. For best results, opt for a mix of risky and less-risky investment vehicles.
Borrowing from your 401(k) isn’t always a bad idea, especially if your other loan options come with a higher interest rate. But in most cases, you should avoid borrowing from your 401(k) or taking out a 401(k) loan. Doing so will likely set you back far longer than the amount of time it took you to save those funds in the first place, thanks to compounding interest.
If you do plan on taking out a 401(k) loan, keep the following information from the IRS in mind:
– Generally, you’re allowed to borrow up to 50% of your vested account balance to a maximum of $50,000.
– You’ll most likely have to pay back the loan in five years, unless you use the 401(k) loan to buy a house.
Variable annuities can offer some benefits, according to the U.S. Securities and Exchange Commission. For example, these annuities make it possible to receive regular payments throughout the rest of your life. They also have a death benefit, meaning that if you die before you started receiving payments, your beneficiary can receive a specified amount. Finally, variable annuities are tax-deferred, so you won’t have to pay taxes on income until you withdraw the money.
But in comparison to other mutual fund options, variable annuities can cost 50% to 100% more in fees and surrender charges, according to Financial Mentor. Further, the gains on these accounts are taxed as normal income — not at the lower capital gains rate — upon withdrawal.
Time is of the essence when it comes to retirement planning. Start even a decade later, and you’ll have to dramatically adjust your monthly contributions to make up for lost time. Take a look at the following scenario of a 40-year-old planning to retire at 65 with a rate of return of 7%:
Current principal: $20,000
Monthly addition: $500
Years to grow: 25
Interest rate: 7%
Total savings after 25 years: $488,042.88
Here’s how much a 50-year-old can expect to save by 65 with the same parameters:
Current principal: $20,000
Monthly addition: $500
Years to grow: 15
Interest rate: 7%
Total savings after 15 years: $205,954.76
In order to save as much as the 40-year-old by retirement, the 50-year-old would need to put aside over $1,400 each month.
If you’re in your 20s and putting over 10% of your income toward retirement, you might want to slow down. Sure, you’re setting yourself up for a comfortable retirement by saving aggressively at a young age. But if you aren’t putting money toward other goals, you might have to take on more debt to buy a house or buy a new car when your old one breaks down.
27. Avoiding Stocks
A 2017 Ally Invest survey found that 61% of adults find the stock market either scary or intimidating. But you likely won’t see your retirement savings grow by relying only on bonds, certificates of deposit and traditional deposit accounts — especially at today’s low rates.
For your retirement portfolio to be truly diversified, you’ll likely want to include some stocks. Speak with a financial advisor to find out just how much stock your portfolio can handle.
Healthcare in retirement rarely comes cheap. Fidelity Investments estimates that a couple retiring in 2017 should expect to spend approximately $275,000 on medical expenses throughout retirement. This number is $15,000 more than the predicted healthcare costs from 2016.
With healthcare expenses increasing each year, it’s important to factor in medical costs when budgeting for retirement. Opening a health savings account can help ensure you are socking away enough.
Consider the true costs of retirement and be honest about the following:
– What kind of lifestyle you want
– Your travel plans
– Your business goals
– Whether you’re planning on helping your children or grandchildren with expenses
Draft a retirement budget that’s realistic and assess whether you need to make sacrifices now to achieve your future financial goals.
When faced with the prospect of saving for the future or paying down debt, many people struggle to determine which takes precedence.
Because time is crucial when planning for retirement — even if it’s a few decades away — it’s best to devise a strategy that allows you to pay down debt while still saving for retirement.
Many parents want to save money for their children’s education; however, if you’re contributing to a college fund rather than a retirement account, you might be putting your own future in jeopardy. While there are various options to help your child pay for college — such as student loans, scholarships, grants and work-study jobs — you probably can’t take out a loan to cover your retirement.
For many people, retirement means transitioning to a fixed-income lifestyle. Carrying debt into retirement is therefore detrimental to your financial strength and can eat away at your retirement savings. Do your best to get all debt paid off before you stop working.
When planning for retirement, you’ll also want to make sure inflation doesn’t ruin your nest egg. Because inflation increases the costs of goods and services, it’s possible that your purchasing power will suffer in retirement — even if the inflation rate is low.
Fidelity found that an item costing $50,000 today — such as a car — would cost $82,030 in 25 years at a 2% inflation rate. If the inflation rate was 4%, that cost would be $133,292.
To battle inflation, Fidelity recommends choosing investments that can keep up with inflation, such as stock mutual funds or real estate securities.
If you started your retirement savings five, 10, 15 or even 20 years late, it’s still worth the effort to catch up.
Start by taking advantage of your retirement account’s catch-up contributions policy. People over 50 can contribute an additional $6,000 a year to a 401(k) or $1,000 to an IRA. You can also downsize to a smaller home and find unconventional ways to make more money.
And remember, you’re not the only one who’s behind on retirement savings. Hopefully, that gives you the motivation to start planning for retirement today.
Sydney Champion contributed to the reporting for this article.