Making mistakes with money is an inevitable life-learning experience. Knowing how to avoid them can give you a head start in reaching your retirement goals.
Retirement planning can be complex. From saving too little to claiming Social Security too early, there are plenty of ways you can sabotage your golden years.
It’s never too late to start getting smart about money, so here are six big money mistakes people make every day that a comprehensive retirement plan could help you avoid.
Quitting Your Job
The average Iowa worker changes jobs around 12 times in their lifetime, according to a 2019 Bureau of Labor Statistics (BLS) survey of baby boomers. But many do so without realizing they are leaving money on the table in the form of employer contributions to their 401(k) plan, profit-sharing, or stock options. It all has to do with vesting, which means that you don’t have full ownership of the funds or stock that your employer “matches” until you have been employed for a set period (often 5 years).
Making a decision to leave the workforce, or change job roles without seeing what your vesting options are could prove to be a costly mistake.
Spending Too Much/Not Saving Enough
It’s never too late to cut back on expenses and prioritize saving. Many financial advisors would suggest at least 10% to 15% of total income should go into retirement savings over your working life.
As you near retirement, you will want to make sure you are working to help maximize your 401(k) or individual retirement account contribution and better decreasing your debt and spending:
401(k). If your company offers a 401(k), try to contribute as much as you can. Any contributions are made on a pre-tax basis, meaning it helps to reduce your taxable income in the year of your contribution.
IRAs. If there is no 401(k), take out a traditional or Roth IRA, but realize that you will have to save more since you are not getting matching funds from your employer. You can contribute a maximum of $6,000 per year (in total) to a traditional or Roth IRA for 2020 and 2021.
When it comes to family, it’s hard to say no. But you don’t want to blow your retirement funds by being too generous with your adult children. Think long and hard about how much you can afford to contribute toward the down payment on a house, a lavish wedding, or even paying for recurring expenses like cell phones or insurance.
Forgetting About Taxes
If you’ve been saving for a while, you might get excited when you peek at your balance. Don’t forget that a chunk of that money — assuming it’s in a 401(k), traditional IRA or similar tax-deferred account — will go to taxes.
If you believe your tax bracket will be higher in retirement than during your working years, it may make sense to invest in a Roth 401(k) or Roth IRA, as you will pay taxes on the front end and all withdrawals will be tax-free. (What’s more, you won’t pay taxes not just on your investments, but on all the money those investments have earned.)
On the flip side, if you think your taxes will be lower in retirement, a traditional IRA or 401(k) is better since you avoid high taxes on the front end and pay them when you withdraw.
Forgetting About Long-Term Healthcare
According to Fidelity, a 65-year old couple retiring in 2021 can expect to spend $295,000 in healthcare and medical expenses throughout retirement, compared with $285,000 in 2019. And that is excluding long-term care. In most cases in the State of Iowa, as long as you’ve worked at least 10 years and paid Medicare taxes during those years, you’re eligible for Medicare starting at age 65. If you have certain disabilities, you can qualify for Medicare before age 65 and you are eligible at any age with End-Stage Renal Disease.
Whether over or under age 65, once you have health insurance in retirement, you should be proactive about evaluating it by conducting an annual review of your coverage options during open enrollment each fall. Benefits and costs change, and it’s possible a new plan may offer you better coverage at a lower price. Maintaining health insurance when you retire could be essential for your financial stability since your health needs typically increase as you age. Without insurance, you may be on the hook for thousands in medical bills.
Not Implementing Estate Planning
Effective estate planning can help you to manage your affairs during your lifetime and control the distribution of your wealth after death. An effective estate strategy can spell out your healthcare wishes and help ensure that they’re carried out – even if you are unable to communicate. It can even designate someone to manage your financial affairs should you be unable to do so.
While estate planning is an ongoing strategy, there are common documents that are part of it: a Will, Living Trust, Powers of Attorney for your assets and healthcare directives, customized tax planning and other more complex components of a customized Trust.
The overarching goal is to preserve your assets on the journey to retirement and to make sure that your wishes are carried out after you pass away, so that your loved ones have an easier process.
Not Planning for Retirement Surprises
Life is full of ups and downs, twists and turns. It’s possible that you end up retiring earlier than you planned to, because of health issues or a disability that makes it so you can no longer work. There’s also the possibility you lose your job, and struggle to find employment at an older age.
It’s best to plan for the worst, so you have extra funds when disaster hits. By putting money aside into an emergency fund—even a small amount—for these unplanned expenses, you’re able to recover more quickly and get back on track towards reaching your larger savings goals.
No matter where you are on your retirement journey, you have likely made some mistakes along the way. In addition to avoiding the six problem areas above, seek advice from a trusted financial adviser to help you stay—or get back—on track. The outside perspective of a financial advisor can also be handy, especially if your financial life is becoming more complicated over time.
Johnson Wealth and Income Management offers a wealth of services custom-designed to help you get the most from your retirement. Our commitment is to help you work towards achieving all your financial goals and to help provide you with a “worry free” retirement. Contact us here today to set up a consultation.
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