Retirement planning is often an aspect of life many people don’t consider until they are more than halfway through their working years. Realistically, the sooner you start developing a retirement plan, the better off you’ll be financially when the time comes. Here are four most common retirement mistakes we believe many people make and what you can do to avoid them.
1. Get a Late Start for Saving
Many people don’t give retirement a thought until they reach their 30s and 40s. By then they are saddled with mortgages, student debt, and are managing other expenses that come with owning a home or having a growing family. What they don’t realize is they should have started saving a decade or two earlier. Even stashing away a small amount every year in an IRA starting at age 21 can yield good results. Once a person passes through their 20s and is into their 30s, time starts to become of the essence. CNBC reports by age 67, Fidelity Investments recommends you should have 10 times your final salary saved.
2. Borrowing from Retirement for Emergencies
Unexpected events can be costly. In an emergency situation, people often turn to their retirement accounts to quickly cover these expenses. This is costly for several reasons.
- Triggers tax issues.
- Potentially comes with early withdrawal penalties.
- Takes time to pay back or rebuild.
People borrow from retirement funds with the mindset they’ll replenish their accounts, but often life gets in the way and the payback plan doesn’t materialize. The better plan is to establish a separate emergency fund and stash away a small amount every paycheck.
3. Not Strategically Job Hopping
Job hopping is a common practice nowadays and, in many cases, this is fine if separate retirement planning is on track that isn’t connected to employment. A huge mistake many people make is taking jobs that offer retirement perks, but resign before they are vested in these plans which can include 401(k)s, profit-sharing, or stock options. Always check to see what financial benefits are lost before quitting a job to avoid leaving good retirement money on the table. Definitely explore if the new job will make up for any financial losses.
4. Carrying Too Much Debt
Carrying too much debt not only results in high-interest payments, it inhibits an ability to save for retirement. A big mistake people make is to buy what they need or want now without giving thought to how their current level of spending will negatively impact their retirement years. Before taking on debt, consider whether the purchase(s) will be of value or even have significance in years to come. Plan to have any debt paid down before you retire.
5. Failing to Have a Retirement Plan
The largest mistake people make is failing to have a proper retirement plan at all. These failures include:
- Not knowing where their retirement income will come from.
- Neglecting to consider ways to minimize taxes during their working years so they’ll pay fewer taxes either upfront or after retirement.
- Not considering what to do if their health condition deteriorates or their spouse passes away.
- Relying solely on Social Security and/or filing at the earliest eligibility (May be better to wait to collect until a later age if possible).
Investment planning and post-retirement planning is a significant part of planning for one’s golden years. Avoid these mistakes and start planning sooner than later because later will come sooner than you think. Give the accounting professionals at Tostrud & Temp a call to ensure you are well-prepared for retirement at 608-784-8060.