Nearing retirement, your thoughts may start to drift farther and farther away from the job at hand and closer to what you’ll be able to do in all that free time - catch up on some reading, enjoy an afternoon on the back nine or travel the world with your husband or wife. And who doesn't want to have total control of how they spend their time!
But if you have yet to start planning for when you can retire and what that phase of life will look like financially then you may be feeling more overwhelm than excitement.
Retirement planning is one of the most important steps an individual or couple can take, as there is a lot on the line.
Retirement Planning Mistake #1: Neglecting To Create a Retirement Plan
According to a 2019 retirement confidence survey, 8 in 10 retirees said they were feeling confident that they’ll have enough to live a comfortable retirement, yet only 42% (or 4 in 10) have actually attempted to calculate how much money they’ll need in retirement.
The first (and one of the biggest) money mistakes any pre-retiree can make is not heading into retirement with a plan. And there is so much at stake that why wouldn't you plan! Understanding how much you really 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 and your spouse 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.
There are a lot of moving parts that need to be coordinate with retirement, such as ensuring you won't outlive your money, social security planning, account withdrawals, taxes and enjoying your retirement years, just to name a few. A financial advisor can assist you in creating your retirement plan and recommending any necessary adjustments to put you on track.
Retirement Planning Mistake #2: Lack of Sufficient Savings
Once you’ve created your retirement plan and discovered how much you and your spouse need for retirement, it may become more clear as to why you shouldn’t delay the savings process.
And 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 couple thousand now could potentially turn into tens of thousands in retirement (depending how the markets perform, what you invest your money in, and how many years away 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. And don't forget, your invest time horizon is not simply now until your retirement date, but rather is the remainder of your life. Than can be a long investment time frame to let compounding work!
Follow these tips to either increase your savings or reduce the amount of savings needed (by lowering expenses!)
- If you supported your children financially until recently and they are now self-sufficient (congratulations!) then redirect those funds to your savings goals.
- Make sure you are maxing out your employer retirement account. For individuals over age 50, you are eligible to contribute an additional $6,500 per year, on top of the normal limit of $19,500 per year, for a total annual employee contribution of $26,000 in 2021, per IRS limits.
- Lower your cost of living, if possible. Downsize your home, cut back on dining out, reduce the number of cars you own. As previously stated, a big part of retirement planning is understanding your expenses. Once you know where your money is going you can determine areas that you may be able to cut back on to ensure a successful retirement.
Retirement Planning Mistake #3: Under-Utilizing 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 they are created. For example, if your income is $100,000 but you put $19,500 into a 401(k), your taxable income for the year drops to $80,500. And don't forget about the tip mentioned above. For persons over the age of 50, you can contribute an additional $6,500 per year into your 401(k), resulting in more savings and a larger reduction in taxable income.
Roth IRA and 401(k) contributions are still taxed as part of your income for the year they’re added into the account, but then they are withdrawn from the account tax-free during retirement.
Be sure to stay up to date on the annual contribution limits each year going forward, as the limits are generally increased every few years. That allows you to save more and potentially receive more tax benefit.
Retirement Planning Mistake #4: Not Aligning Your Investment Portfolio To Your Situation
Now that you are at a later stage in your career, it is likely that you have changed employers over the years. But have you kept up with those old employer accounts?
All to often, people forget about their old retirement accounts when changing jobs. This could lead to stagnant investments and lost opportunity.
You will likely need to rely on your investments to assist in funding your retirement. Therefore it is of utmost importance to ensure that your portfolio is being properly managed and that your investment strategy is aligned with your risk tolerance and your financial goals.
For many, the thought of managing their investments causes anxiety and leads to inaction. If that is you then seek financial assistance from a professional to assist you with your portfolio management. Do not just avoid the situation!
Do Not Delay Your Retirement Planning
Preparing for retirement can bring about a mix of emotions - excitement to leave the workforce and anxiety about affording your ideal standard of living, just to name a few.
Putting the time and effort into your retirement planning can be the difference between a successful retirement and needing to rely on others for assistance. Don't delay any further and take action today. It is never too late to start planning.
Crest Wealth Advisors provides unbiased, objective advice to assist pre-retirees in planning for their retirement. If you would like to learn more or schedule a free consultation today then schedule a meeting today.