Retirement is supposed to be a fulfilling and rewarding chapter of your life — but it can feel less than relaxing if it’s not well planned for. To ensure you’re able to live comfortably in life’s next chapter, start planning early and take advantage of technology to help you monitor your success. Here are four common mistakes people make when planning for their retirement — and how to avoid them!
- Not having a plan — or starting too late
This is perhaps the most obvious mistake people make and it will really have an adverse impact on your retirement income. It’s worth stressing the importance of having a written plan and implementing it as soon as possible. Continually putting off your retirement plan until you’re 30, 40 or even 50 years old is asking for trouble. Not only are you not contributing funds into your nest egg for those years, but you’ll be missing out on compound interest, essentially losing out on free money!
Avoid this by: Starting a retirement plan right now (if you haven’t already). Utilize on-line retirement tools to set-up, monitor, budget, and track your progress (today’s “written” plan). Take advantage of your employer’s 401(k) match plan (if they offer it) or start your own IRA. The important thing is to start saving and automate it – automatic deductions from your paycheck or checking account every month. Even if you start small – something is better than nothing and you will be creating the “habit” of saving.
- Dipping into your retirement fund for non-retirement purposes
When you withdraw money from a retirement account before the age of 59 1/2, it comes with a large penalty and taxes. Unless you can qualify for a hardship exception, then expect to face a 10% penalty on early withdrawals as well as regular income taxes at your marginal tax bracket. There could even be additional fees specific to certain types of investments. Obviously, funds withdrawn early will miss out on compound interest as well.
Avoid this by: Splitting your savings between retirement and non-retirement accounts. A good rule-of-thumb is to save 25% outside of a retirement account. For example, if you can save $100 each month, then take $25 and put it into a traditional savings account or money market fund that you can easily access, without the taxes and fees associated with early withdrawal from a retirement account. Only use retirement funds as a last resort and investigate whether your plan offers a loan option as opposed to a direct withdrawal.
- Taking too much risk in the stock market
Logic suggests that the younger you are, the more risk you can take with your investment capital. This is because you have more time to go through market volatility and you have the ability to earn income (whether your investments do well or not). However, when you get closer to retirement, your ability to earn income begins to diminish and your need to live off your nest egg becomes more of a reality. At this point, if you are taking too much risk, you could have a bad “sequence of returns”. This is when you experience negative market years early in retirement, which could have devastating affects to your overall success.
Avoid this by: Having an income plan that pulls from fixed accounts and leaves equities in place for long term growth (10+ years). Some call this the “Bucket” approach. For example, set aside enough money in fixed accounts (investment-grade bonds, fixed annuities, CDs, money market, etc.) to draw down your needed income for the first 10 years of retirement. This will allow your equities another 10 years of growth and pushes out your sequence of returns risk as well. At the end of ten years, move enough money from equities to fixed accounts for the next ten years….and so on.
- Relying too heavily on Social Security
Social Security has been a stalwart of income for retirees for many years, but that may be changing very soon. According to the Social Security Administration, they will be unable to pay the full promised benefits by the year 2032. By 2034 the Trust Fund will be completely depleted and only about 75% of promised benefits will be distributed. While congress has been actively discussing this, little has been done to resolve the current state of Social Security.
Avoid this by: Starting early by creating and maintaining a written plan of action – something you can stress test. Stress-testing market conditions, policy making, taxes and other conditions will help you visualize the future – no matter what is thrown your way! We even offer FREE planning software to help you get started. If you feel you need additional help, seek out an independent financial advisor, or better yet, a fiduciary! Fiduciaries are obligated to follow a standard of care that requires them to put their client’s interests above their own.
Scott Campbell (RICP) of Austin First Financial is a Retirement Income Certified Professional with over 20 years of experience helping people retire . “What you are doing for the very first time, I help people with on a daily basis” – Scott Campbell