Are You Beginning to Prepare for Retirement?
The average retirement age in America is 61 years old. However, this average is steadily increasing as Americans continue to live longer. Because this number is growing, it’s more important than ever to ensure you are adequately planning for retirement.
If you plan, your golden years can be stress-free and one of the most enjoyable times of your life. If you leave yourself without a plan, these years can be filled with financial stress and uncertainty. There’s more to retirement than just funding your retirement account, but if you educate yourself and begin planning early, it can be pretty simple.
We’re uncovering the ten biggest mistakes to avoid when preparing for retirement.
1. Failing to Maximize Employer Match
Many employers offer a 401(k) retirement plan, a plan sponsored and contributed to by the employer. It allows workers to invest a portion of their paycheck into their retirement fund on a tax-deferred basis.
If an employer matches up to 4 percent of the employee’s salary, then that employee should also be contributing at least 4 percent of every paycheck into the plan. In doing this, the employee saves up to 8 percent of their salary each year. While this may not feel significant at first, the amounts add up, especially for long-term employees.
Go beyond the employer match and contribute the maximum allowable if possible. This contribution uses pre-tax dollars, so you’re making an excellent retirement decision and arguably an even better tax decision.
2. Borrowing from Your Retirement Fund
Many people treat their retirement fund as simple, accessible money and use it for last-minute trips, paying down the mortgage, or making unexpected purchases. Borrowing money from your retirement fund is an extremely costly mistake.
This borrowing is often in the form of a loan that must be paid back in full. There is an opportunity cost to using your 401k as a piggy bank since your returns are typically lower than other investment opportunities over the long run.
Another risk occurs when you leave your job before paying back the loan. If not paid in full, the loan can be seen as a distribution, meaning you may have to pay taxes or face a significant withdrawal penalty.
3. The Possibility of Retiring Early
We all have a rough idea of when we plan to retire. It’s important to understand that retirement does not always follow our plan. A health crisis may force you to retire earlier, or you may need to retire early to take care of a sick partner.
Studies reveal that 69 percent of baby boomers retired earlier than they initially expected. Factors such as poor health, low energy, or job fatigue often shift our perspective on when to retire. You’ll want to plan your finances for the potential of early retirement. You could contribute a higher percentage of money to your 401(k) or plan with your financial advisor.
4. Not Using a Financial Planner
Think of a financial planner as a coach for your bank account and savings. They are trained professionals who help you manage your money and provide sound financial advice. They can also help you initially select and then manage your investments throughout your life.
Ideally, you should begin working with a financial planner when you begin your first career job. However, it’s never too late to start. Your financial planner will help you sort your finances and prepare for your retirement.
Why fee-only? Choose a fee-only advisor to mitigate conflicts of interest. The National Association of Personal Financial Advisors defines fee-only advisors as those who can provide unbiased and objective financial advice, planning, and investment management. Choosing a fiduciary ensures you’re working with a professional who has made an oath to serve only the client and their best interests.
Many financial advisors work under the suitability standard, which allows them to sell “suitable” solutions that may not necessarily be the best solution for the client. Demand a fiduciary oath from your advisor.
5. Having No Active Income
Retirement doesn’t always have to mean leaving the workforce entirely. As more opportunities for earning money on the side become possible, retirees are considering part-time work. This could include online ventures such as blogging and teaching, or real-life jobs such as handyman/handywoman work or personal businesses.
Retirees that choose to work after retirement often base their work on their passions. An artist may begin selling their artwork, or an avid gardener may begin working part-time at a greenhouse. These jobs are often low-stress yet contribute regular money to the household and provide a social outlet.
6. Leaving Work Early
One significant mistake many individuals make is retiring too early. Americans are living longer today than they ever have before, and the average retirement age continues to increase.
Consider someone who works until age 60 instead of retiring at 50. By working an additional decade, they prolong the retirement money that would have been spent for that entire decade. The result is not having to stretch their retirement money for as long a period.
7. Cashing Out of Your Plan
When an employee leaves a job with a retirement account, they have three basic options. Most employees are unaware of these options.
First, you can leave the money in the account. This is often the choice if you don’t have another retirement account where you can transfer the funds. These funds can be withdrawn later without major penalties. Research the fees for investment alternatives in your 401(k) and move investments if fees are high.
Second, you can use a trustee to transfer the money to a new employer’s account. This is only an option if the new employer also offers a retirement plan.
Third, you can cash out of the account. While this may sound tempting, it’s usually well worth avoiding. If you cash out before age 59.5, you must pay taxes plus a significant withdrawal penalty. 1 in 3 investors cash out of their retirement plan before age 59.5. In extreme situations, removing this money can cut that money in half!
8. Expensive Location
While residing in an urban metropolis was worthwhile during your working years, it may be time to reconsider your location. Throughout your career, it may have been beneficial to reside in an expensive city. However, retirees often continue living in expensive urban areas when it no longer benefits them.
While it may have been affordable with a regular income, remember that your budget changed. Consider living in a location with a more affordable cost of living. These can be areas outside the urban core or even rural areas. Studies reveal that Alabama is the most affordable state to retire in. Many Birmingham families are making the move to Florida's Emerald Coast, where the combination of no state income tax and lower carrying costs can stretch retirement savings further. You may also find similar livability in another, less expensive state.
9. Poor Investments
As you near retirement, you need to be more thoughtful and careful with your money. In terms of your investments, this often means diversifying your investment portfolio. In doing this, you reduce your overall financial risk.
When the market is performing well, it’s tempting to chase large returns. However, your situation has changed and high-risk investments are not likely to result in success. Have your financial planner select a diverse portfolio of investments that minimizes your risk while still earning a return. Build a portfolio that fits your individual needs and whose volatility matches your appetite for risk.
10. A Lack of Plan
Consider the length of time in which you will be actively retired. This is extremely significant when planning your savings. The average lifespan for Americans is 80 years old. The average American retires at 61 years old. This means the average American will have 19 years of active retirement.
It’s essential to have a detailed financial plan for those 19 years. You need to ensure that your current financial plan will last throughout that average lifespan. Optimize your location and plan how to spend down your retirement funds. A comprehensive retirement distribution plan helps coordinate Social Security timing, tax efficiency, and withdrawal strategy across all your accounts. Simple techniques can help you stretch your dollar further. If your financial plan is not supportive enough, consider other sources of regular income, such as a part-time job or low-risk investment. Understanding how to claim Social Security strategically can also meaningfully extend what your retirement savings can support.
The Best Route to Preparing for Retirement
Retirement can be one of the most enjoyable time periods in anyone’s lifetime. After all, without the burden of having to work, retirees can finally set aside time to do the things they’ve always dreamed of. However, to get the most out of your retirement, it’s essential to create the right financial plan.
Too often, retirees run into financial troubles and must return to work. Planning includes saving money, speaking with a financial advisor, and choosing the right investments. If you plan accordingly and steer clear of these mistakes, you can rest assured that your retirement should be a positive experience.
