Saving for retirement can be confusing and scary. But you can eliminate much of the worry by avoiding the common retirement planning mistakes people make.
Following are seven mistakes to avoiding when drawing the financial map for your golden years.
1. Failing to plan
Failing to plan is one of the biggest mistakes you can make. If you don’t have a plan, spend a weekend hashing one out. Here are some questions to ask yourself:
- What do I want to do in retirement? Should I save for travel or hobbies?
- How much will I need to cover my expenses?
- How much do I have saved now?
- What is my goal amount?
- How much will I need to reach my goal?
- How much should I put aside a month to get there?
This year is almost over, but it’s not too late to learn from the tips in “Ready to Rescue Your Retirement in 2018? Here’s How.”
2. Starting too late
I started saving for my retirement at age 18 because my parents convinced me to sign up for my company’s 401(k) plan. At the time, it was just a few bucks a month. But that seed money has had time to grow. If I’d started now, I would have missed out on many years of compound interest.
Bottom line: The sooner you start saving, the bigger your pot of money will be when you’re ready to quit work.
3. Not taking advantage of 401(k) plans
If your company offers a 401(k) plan and you’re not contributing, you’re making a huge mistake. Contributions to your 401(k) come out of your paycheck before taxes, meaning it’s a portion of your income that you won’t pay taxes on now. And many employers have a match program, meaning they’ll match your contributions up to a certain percentage. In essence, that is free money.
Talk to your human resources office about your company’s 401(k) plan and sign up ASAP. Then, read “7 Tips for Stress-Free 401(k) Investing.”
4. Not understanding the risks
Stocks come with risks. But if that’s causing you to shy away from investing entirely, you’re depriving your retirement account of an opportunity to grow. On the flip side, you could be taking on too much risk. If you have an aggressive retirement plan loaded with high-risk stocks, you might end up losing a big chunk right before you retire.
As we report in “8 Basics That Beginning Investors Must Know“:
Money Talks News founder Stacy Johnson suggests you subtract your age from 100, and put the difference as a percentage of your savings into stocks. For example, keep the following percentages of savings in stocks:
- 60 percent if you are 40
- 50 percent if you are 50
- 40 percent if you are 60
5. Relying on Social Security
If you’re relying on Social Security to keep you solvent in your golden years, you might be setting yourself up for disaster. Use the Social Security Administration’s Retirement Estimator to see an estimate of your Social Security benefits.
Odds are, it won’t be enough. In September, the average Social Security benefit was $1,371.62, according to the Social Security Administration.
6. Underestimating health care costs
If you assume your health care costs will be covered after you qualify for Medicare at age 65, you might be in for a rude awakening when you retire. Fidelity Investments says a couple retiring in 2018 will need $280,000 on average to cover health care costs in retirement.
7. Borrowing from your future
You can borrow from your 401(k), but that doesn’t mean you should. I worked for a company that actually encouraged people to borrow from their 401(k) plans to cover expenses like a new house or car. You will have to pay it back, but in the meantime your retirement funds won’t be growing as much as they otherwise would if you had left that money in the account.
8. Cashing out early
If you quit your job, you may be tempted to cash out your 401(k), but do so and you’ll not only owe taxes on the amount but you’ll face a 10 percent penalty. If you cash out your 401(k) before your retirement, you’ll have to pay taxes on any money you collect. Instead, roll your 401(k) into an IRA and stay tax-free.
For more tips, check out “Have a New Job? What to Do With Your Old 401(k).”
Do you have more tips for avoiding retirement mistakes? Share them in comments below or on our Facebook page.
Retire on your own terms with help from this course
The Only Retirement Guide You'll Ever Need gives you the knowledge you need to retire on your own terms. Sure, you can pay a financial adviser, but this online course gives you total control to create a customized retirement plan around the things that matter to you -- without the fees you can expect from financial firms and advisers.
You'll get expert, personalized advice. You'll have access to the latest tools. You'll have ongoing support. And when you've completed the course, you'll be ready to approach your retirement with confidence and with peace of mind.
It's time to plan the best years of your life. Let's get started.