As you approach the retirement years, you may start to question how prepared you really are. Do you know how much retirement income you will need? Are you on the right track? Do you understand your 401(k), IRA, and other retirement accounts? Do you understand your Social Security benefits? Although you still have time to prepare, save, and get on the right track, there are some common mistakes to avoid.
Falling for Too-Good-To-Be-True Offers to Supplement Your Retirement Income
There are no shortcuts when it comes to wealth-building. When retirement is looming and you are concerned about your retirement income, it becomes easier to ignore the warning signs and fall for a scam. If you receive an unsolicited offer, guaranteeing spectacular profit in a short time without risk, it is most likely a scam. Anyone who pressures you to make an immediate financial decision so that you don’t “lose out” is also a red flag. This is to discourage you from getting advice from anyone else, and it should let you know the right choice is to walk away. There are ways to continue to grow your retirement fund in the last few years, but if an offer seems too good to be true, it probably is.
Planning to Work Indefinitely and Ignoring Your Target Date
While many focus on a specific age for retirement, others plan to keep working as long as they can. Maybe they want to, maybe they have to, or maybe they simply haven’t thought about a retirement date. But after age 65, you can’t rely on being able to work. Health-related issues, for you or a family member, could force you to leave the workforce abruptly. Plan a target date for retirement and focus your financial planning for retirement income on that date. If you choose to keep working beyond that date, you will know you are covered if something happens.
Claiming Social Security Too Early
You can start taking your benefits at 62, but it is a much smarter idea to wait as long as you can. Waiting until 67 – or 70 if you can afford it – can increase your benefits. At 67 you will receive 100% of your benefits. At 62, your monthly check will be reduced by 30%, and that will last the rest of your life. If you can wait until 70, you will get an 8% boost in benefits every year between 67 and 70. If you retire before age 70 and can manage to live on your retirement income from your savings, it’s a much smarter move to wait on Social Security.
Backing Off or Borrowing From Your 401(k)
Yes, you can borrow from your 401(k), and you usually have five years to pay it back. But unless you have a financial emergency, this is a big mistake. You miss investment growth, you will pay interest on the loan, and there are tax penalties as well. This is why having an emergency fund is crucial, but if you don’t have an emergency fund and you need money quickly, look into other loan options.
Now is not the time to back off on retirement saving. It may be tempting to decrease your contributions, but the last ten years before retirement is the right time to keep your foot on the gas.
Having Too Much Tax Deferred Money
Is there such a thing as having too much money as you get closer to retirement? Of course not, but there certainly is such a thing as having too much tax deferred money. Why, you ask? It comes down to math. When you were working, you and the rest of the working world were at some point told to defer every dollar you can today because taxes will be lower when you retire. And then it happened, one day we woke up and realized that there is no likelihood that taxes will be lower in retirement. Not with a national debt approaching $27.0 Trillion, or with Medicare being bankrupt and Social Security running a deficit by year 2033.
You most certainly didn’t intend to compound your future tax liability to a higher tax, it just happened that way. Now, before you get too close to retirement it may be a good time to learn about what different options you have available to you to become tax-aware with your retirement assets.
What's at stake? It won’t just be the tax hit you take on your tax deferred monies. You will have to calculate the tax penalty you will have to pay out of your social security income. Could the total tax liability on both your tax deferred withdrawals and your social security wipe out most, if not all of the growth you had in your 401(k) during your working years? This may be the most avoidable mistake that is not on your radar.
Putting Your Kids First
While children are young, parents are used to putting their needs first. Parents want their children to have the best of everything. Parents don’t always put a stop to this once their children are grown. They want them to have the best education, the best wedding, and help them out as they begin their adult lives. If you can afford it, that’s great. But your retirement savings needs to be your top priority. You can borrow for school, save on wedding expenses, and help your children without sacrificing your own savings, because you cannot borrow for retirement.
Forgetting About Long Term Care
No one wants to assume they’ll spend their retirement years in need of long-term care. But serious illness can happen, and the sticker shock that comes with long-term care can wipe out all your careful retirement savings. Medicare won’t cover most long-term care costs. Purchasing long-term care insurance is a smart decision, but it’s expensive. If you purchase a long-term care plan in your 50s, you can save big on premiums. Once you are over 65, the premiums jump.
Borrowing Against Your Home
If you have paid off, or are close to paying off, your mortgage, tapping into your home equity can be tempting. Yet taking on more debt so close to retirement is usually a financial mistake. Your retirement income may not cover a mortgage payment. Speak to a financial expert about making the right decision about your home and the equity you’ve built up before making any rash decisions.
When you are in the last few years leading up to retirement, monitoring your behavior to ensure that you will have an adequate retirement income is more important than ever. If you aren’t sure whether or not you’re on track, speaking to a financial expert is a good idea. Contact us at Safe Money Partners to talk about your current plan and see if there are ways to increase your retirement income for a financially smart retirement.