For many nearing retirement, thoughts start to drift farther away from the job at hand and closer to what they’ll be able to do with all their free time - catch up on some reading, enjoy an afternoon on the back nine, or travel the world with their significant other. While thinking about fun activities is good, it’s important for anyone contemplating retirement to stop and assess their readiness.
We’ve rounded up the four most common mistakes soon-to-be retirees make regarding their money, so you can prepare now to make your transition into retirement a bit smoother.
Mistake #1: Neglecting to Create a Retirement Plan
Interestingly enough, in a 2019 Retirement Confidence Survey, eight in ten retirees said they were feeling confident that they’ll have enough to live comfortably in retirement. Yet only 42% (or four in ten) have actually attempted to calculate how much money they’ll need.
The first (and one of the biggest) money mistakes any pre-retiree can make is heading into retirement without a plan. Understanding how much money you need to retire before you reach retirement can give you time to adjust your savings strategies, portfolio allocations, or insurance products. Additionally, it can help you understand if your retirement expectations are going to be realistic or not.
Simply put, if you don’t understand how much you should have to retire comfortably, you won’t know if you’re on track.
Mistake #2: Waiting to Start Saving
Once you’ve created your retirement plan and discovered how much you need for retirement, it may become more apparent why you shouldn’t delay the savings process. While putting away a couple thousand now might feel hard to do, it’s important to remember that due to the principle of compound interest, your investment now could potentially turn into tens of thousands in retirement. Of course, that depends on how the markets perform, what you invest your money in, and how many years you are from retirement. The best way to make this happen? Time. Give your money the years (or decades) it needs to collect interest and grow into what you’ll need in retirement.
Mistake #3: Underestimating Long-Term Healthcare Costs
Those between the ages of 65 and 74 spend an average of $5,956 in healthcare costs annually, not including any long-term care. Whether that sounds like a lot to you or not, the number can certainly add up over time and eat into your retirement savings, especially if an unexpected injury or illness occurs.
One way to help with the costs of healthcare is to understand your Medicare coverage and supplemental plan options. For every full 12-month period that you wait to sign up for Medicare upon becoming eligible, you face a 10% penalty that gets added on to the standard premium. You’ll have to pay this penalty on the premium every year that you choose to use Medicare.
Mistake #4: Underutilizing Tax-Advantaged Accounts
Never underestimate the impact taxes can have on your income now and through retirement. Both traditional and Roth IRA and 401(k) options can provide tax-advantaged opportunities that can make a difference in your retirement savings.
Traditional retirement accounts reduce the amount of taxable income for the year of your deposit. For example, if your income is $60,000, but you put $4,000 into a traditional IRA, your taxable income for the year drops to $56,000. Roth IRA contributions are taxed as part of your income for the year they’re added into the account, but they are withdrawn from the account tax-free during retirement.
If you haven’t heard, the IRS raised the contribution maximum for employer-sponsored retirement accounts in 2019 from $18,500 to $19,000 a year and IRA contributions from $5,500 to $6,000 a year for individuals under 50. That makes this an opportune time to begin catching up on your retirement plan contributions if you’ve found yourself falling behind in recent years.
Preparing for retirement can bring about a mix of emotions - excitement to leave the workforce and anxiety about supporting your ideal standard of living, for example. Putting in the work now to help avoid common retirement pitfalls could mean creating more peace of mind as you look forward to enjoying your years of freedom ahead.
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