Jovan Johnson, MBA, CFP®, CPA/PFS
There are some common retirement planning mistakes that you should avoid to ensure a successful retirement. Retirement is meant to be an enjoyable experience where you slow down and enjoy your golden years. However, it is quite common for many individuals to sabotage their golden years by not planning ahead. From saving too late to withdrawing money too early, there are plenty of ways those planning for retirement can sabotage their retirement plan. To avoid some common retirement planning mistakes you must create a plan and goal. I have compiled a list of 6 common retirement planning mistakes and how to avoid them.
Mistake #1: Believing That It Is Too Early For You To Start Planning and Saving For Retirement
There is a common misconception that you should reach your career peak before starting to plan for retirement. It is always a great time to begin developing great savings habits. The earlier you start, the less you actually have to save overtime as compound interest will play a major role. Carve out a portion of your budget for retirement savings.
Another benefit of starting early, is that you can be very aggressive with your investments if you have a high-risk tolerance level. This provides you with more time to earn a higher rate of return and recover if there is a market downturn.
Mistake #2 Not Taking Advantage of Your Employer’s Match and Catch-up Provisions
An employer’s match is almost equivalent to free money. It is unwise to leave “free” money on the table. Create automatic payroll deductions to contribute to your retirement account. Remember that the easiest way to save money is to set it and forget it.
In addition, a common missed benefit with retirement plans is the catch-up provision. At age 50 (or older), you become eligible to take advantage of “catch-up contributions.” This provision allows you to contribute even more to your retirement accounts.
Mistake #3: Withdrawing Money Too Early From Your Retirement Accounts
Retirement savings are intended for you to spend only in retirement. When you decide to utilize these funds earlier, you can trigger both taxes and penalties. You should avoid using funds from your retirement accounts before age 591/2, since you could pay both a 10% penalty and income taxes on the withdrawal.
There are a few exceptions to the penalty rule for withdrawing money early; make sure you check what your plan rules are before going this route. If at all possible, consider other resources before tapping into your retirement accounts for immediate needs. Avoid robbing your future retirement to fulfill current needs.
Mistake #4: Not Increasing Your Contributions As Your Income Rises
It is very important to revisit your budget frequently to see if there are any opportunities to save more money. One way to force yourself to save more as your income increases is to allocate percentages to each budget category. Also, some retirement plans allow for an automatic percent increase annually. This is ideal if you are expecting your income to increase every year.
Check out my lifestyle inflation blog here where I discuss tips on how to manage lifestyle inflation.
Mistake #5: Investing in Your Children Instead of Yourself
I understand that we all want our children to be successful. We want them to get a great education, preferably debt-free if possible. However, do not sacrifice your future to fund your children’s college education. Remember that your children have many funding options such as loans, scholarships, grants, working, etc. that can help them fund their own college education. However, your options are much more limited when it comes to funding your retirement. Make sure you are prioritizing your needs first.
Mistake #6: Not Adjusting Your Investments As You Get Closer To Retirement
When you are young and far from retirement, you are able to invest in riskier assets. However, as you get closer to retirement, you probably do not want to risk your savings since you will need to start withdrawing from the account soon. If the market experienced a downturn and your money was invested in mainly equities, you would have little time to recover.
Make sure you adjust your asset allocation to a less risky portfolio as you are approaching retirement. This will help you to avoid selling assets at a loss to make ends meet. You can proactively decrease your exposure to risk through diversifying your portfolio. If you want help with drafting a tailored portfolio based on your life and financial goals, retirement time horizon, and risk tolerance, please speak to a qualified financial professional or schedule a free consultation by clicking here.
KEY TAKEAWAYS
- Start saving for retirement as early as you can. The earlier you start, the less effort you have to put in later in life.
- Do not leave any free money on the table. Take advantage of all employer benefits.
- Consider all of your financing options available to you for immediate needs before tapping into your retirement savings.
- Prioritize saving for retirement.
- Consider asset allocation, time horizon, and risk tolerance when you are investing for retirement. Talk to a financial professional to create a tailored portfolio for your needs.
Disclosures
None of the information provided is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Piece of Wealth Planning LLC does not promise or guarantee any income or particular result from your use of the information contained herein.