Saving for retirement can be confusing. It’s no surprise we make mistakes along the way. Here are the most common retirement mistakes people make and how to avoid them.
1. Failing to create a plan
A written retirement plan that includes each of your financial goals for retirement is a must if you want to spot potential hurdles to meeting those goals. Creating a financial plan for retirement means estimating future expenses and expected income, to ensure your retirement savings will last the full length of retirement. With many people living longer than ever, it's easy to underestimate how long your savings will need to last. Working with an advisor to develop a plan and help you understand these different factors can prevent issues with under saving as you approach retirement.
2. Forgetting about taxes
If you’ve been saving for a while, you might get excited when you peek at your balance. Don’t forget that a chunk of that money — assuming it’s in a tax-deferred account like a 401k — will go to taxes. You can’t avoid taxes, but you can diversify with after-tax accounts. For example, with a Roth IRA, you put money in after you’ve paid taxes. Then, your money, including investment earnings, comes out tax-free in retirement.
Owning a Roth IRA or taxable account in addition to tax-deferred accounts helps you manage your taxes in retirement. If distributions from a 401(k) or traditional IRA will push you into a higher tax bracket, you can use money from a Roth to keep your tax rate lower.
3. Overpaying on fees
There are many retirement-account fees to watch for, including mutual fund loads and expense ratios, trading commissions, and account maintenance fees. All of these eat into investment returns over time. If you haven't already, do a deep dive on your portfolio or contact us for a free portfolio analysis to make sure you are keeping as much of your hard earned money in your pocket as possible.
4. Tapping savings before retirement
Emergencies happen, but people sometimes pull money out of retirement accounts when it’s not absolutely necessary. Doing so triggers taxes and a potential 10% penalty. Depending on your tax bracket, this could significantly eat into the amount you’re withdrawing. Make sure you have some liquid assets set aside in case of emergencies so you can avoid this painful action.
5. Taking on too much, or not enough, investment risk
It can be hard to get investment allocations just right. There are many factors to consider like risk tolerance, time until retirement, current savings balance, etc., but regardless of where you're at on your path to retirement, proper asset allocation is key to successful retirement saving.
Investing too conservatively can limit the growth of your portfolio and prevent you from reaching your savings goals, and investing too aggressively can lead to unnecessary risk that would put your savings in jeopardy in down markets.
6. Failing to save enough
Making sure you're saving enough for retirement is key, but sometimes not saving enough isn’t possible due to lack of resources. Regardless of why you haven't saved enough, there are ways to address it. If you’re older and retirement is coming up fast, working longer may be your best option. In today's world many people are pivoting to a part time job or side hustle in retirement to help make up for missing retirement savings.
That being said, working longer isn’t a possibility for everyone. Circumstances of life can make this very difficult. When this happens, another strategy that you can deploy anytime is to trim your spending. This is not always easy, but can significantly improve your odds having your retirement savings last through retirement.
Making sure you avoid these common retirement mistakes is critical to ensuring you have the assets you need saved to live the retirement you want. So if you haven't taken the time to develop your retirement plan, or are unsure if you're making any of the mistakes mentioned above, there's no time like the present to get your plan started. To learn more about how you can get a plan in place to protect your retirement and family's financial future, schedule a call with our team today!
Mike Bink, AAMS®, CCFS®
Mike is the founder & president of Equivest Financial Advisors. He is a husband, father of 3, and a fiduciary advisor who is passionate about helping his clients take control of their retirement and reach their financial goals. Learn more about Mike.