How’s your retirement fund looking these days?
For 37% of non-retired adults, they believe that everything’s on track. But, for 44% of people? They don’t feel this way.
To be fair, those who feel that their financial future isn’t looking too bright didn’t intentionally sabotage their retirement. Instead, they just made some mistakes along the way that they weren’t aware of. Thankfully, it’s never too late to get back on track as long as you avoid these seven retirement gaffes.
Mistakes You Are Making About Retirement
1. Relying only on Social Security.
“Your retirement benefit is based on your lifetime earnings in work in which you paid Social Security taxes,” explains the AARP. So, those with a higher income can expect “a bigger benefit. However, this is capped at $142,800. Other factors include the age that you begin claiming your benefits.
On average, though, “the estimated average Social Security retirement benefit in 2021 is $1,543 a month, notes the AARP. That comes out to $18,516 per year. For reference, the poverty line for a single-person household is $12,880.
Unless you’re debt-free and can live an extremely frugal lifestyle, that’s not a lot of money to live off of. What’s more, there’s a concern that Social Security funds will be exhausted by 2035.
That most likely won’t happen as long as workers and employers pay payroll taxes. However, there’s a good possibility that Social Security benefits won’t be as high.
Regardless, don’t expect to completely fund your retirement on Social Security alone. After all, it’s advised that you should have between 70% to 90% of your annual pre-retirement income saved in retirement. So, if you were making $75,000 a year, you need between $52,500 to $67,500.
In short, you need to have a diversified retirement portfolio consisting of savings, Social Security, stocks, and bonds. And, if you haven’t gotten started, start stashing aways with whatever you can ASAP. Even if it’s just $25 per month is better than nothing at all.
2. Saving without a plan.
At the same time, you need to have some direction with your savings. It’s like trying to put together a dresser from IKEA. Without the instructions, good luck assembling your new piece of furniture in a timely and stress-free manner.
The same is true when it comes to planning your retirement.
Research from Schwab Retirement Plan Services found that 401(k) participants believe they need $1.7 million. The problem? They’re not investing enough to reach that goal.
“The people we surveyed have a realistic target for retirement, but many likely aren’t on track to get where they want to go. It’s important for anyone with a 401(k) plan to understand that they’re already an investor, whether they realize it or not,” said Steve Anderson, president, Schwab Retirement Plan Services.
“Shifting your mindset from ‘saving for retirement’ towards ‘investing for retirement can help you to better understand that you are participating in the market when you contribute to a 401(k), and ultimately better help you reach your goals,” he adds.
“Any effort to set aside money for the future is worthwhile,” added Catherine Golladay, chief operating officer at Schwab Retirement Plan Services. “That said, money intended for retirement has far more growth potential if it’s invested through an IRA or Health Savings Account, for example, than if it’s placed in a regular savings account.”
“Having access to more investment education could help participants get more out of their investments, both inside and beyond their 401(k) accounts,” she said.
What do you want your retirement to look like?
Retirement calculators can help give you a ballpark figure. But, you should also take into consideration the following;
- The average lifespan of family members like your parents and grandparents.
- Your target retirement age.
- Housing, utilities, and taxes.
- How much debt you’ll have, such as a mortgage.
- Medical and long-term care.
- Insurance and health coverage.
- Hobbies and lifestyle.
In short, envision what you want your retirement to look like. And, from there, develop a realistic plan to make that a reality.
3. Investing in variable annuities.
“Annuities are set to create a cash flow in retirement,” said Richard Hall, a financial planner at Pitzl Financial. “A variable one is one that can invest in the market.”
If you’re not familiar with annuities, this is where you make payments to an insurance company. They invest the money that you’ll then get in guaranteed monthly payments in retirement.
It’s kind of like funding your own personal pension.
Here’s the problem with variable annuities. First, they can fluctuate depending on the market. Second, they can come with expensive fees — sometimes as high as 3 percent.
“You’re giving away 3% a year, almost,” Hall said. “When you start to compound it, it becomes a pretty massive differentiator.”
Instead, invest in a fixed annuity. They’re more stable since they won’t drop below a minimum interest rate.
For instance, Due offers a fixed annuity plan where you’ll get a 3% guaranteed interest rate on the money you invest. That means you’ll know exactly how much you’ll get per month after the age of 65.
4. Choosing the wrong tax strategy.
Sorry to be the bearer of bad news; you’re still going to have to deal with taxes in retirement. The good news? You can actually pay your taxes today instead of tomorrow.
With a Roth 401(k) or Roth IRA, you’re allowed to pay your taxes upfront. Even better? When it’s time to make a withdrawal, it will be tax-free.
Investing in these types of accounts can also be helpful if you believe that you’ll be in a higher tax bracket when you retire. If not, then stick with a traditional IRA or 401(k). These tax-deferred plans let you pay your taxes when making a withdrawal down the road.
Ideally, you should have both taxable and tax-free buckets of money in retirement.
5. Quitting your job.
Are you a job hopper? If so, make sure that you aren’t leaving any money on the table before quitting. Usually, this means matching employer contributions to a 401(k) plan, profit-sharing, or stock options after you’ve been there for a set period of time — often, it’s 5 years.
Since people, on average, change jobs every 4.2 years, your best bet is to hand in there just a tad bit longer to meet the vesting period requirements.
6. Borrowing from your retirement funds.
Amid the pandemic, 6 in 10 Americans withdrew or borrowed money from a 401(k) or individual retirement account (IRA). I completely understand that desperate times call for desperate measures, but this could come back to haunt you.
If you cash out your savings before your 59 ½, you’re going to get hit with a 10% early withdrawal penalty. However, the Coronavirus Aid, Relief, and Economic Security (CARES) Act did wave these fees from certain retirement accounts until December 31, 2021.
If anything, this unexpected pandemic reminded us all just how important it is to have an emergency fund. It’s suggested that this should cover at least 3 months of expenses so that you don’t have to borrow from your retirement funds.
7. Being a chicken when it comes to investments.
Do you remember when Griff Tannen called Marty McFly a chicken in Back to Future Part 2? Marty got all riled up and proclaimed that nobody calls him chicken.
When it comes to investing, you should have the same mentality as Marty.
Obviously, this doesn’t mean doing something irrational, like dumping all of your savings into Dogecoin. Rather, it’s improving your financial literacy so that you are more comfortable with terms like diversification and asset allocation.
Don’t be afraid to start an investment portfolio that’s, once again, diversified. It will help you accumulate wealth, outpace inflation, protect your assets, and mitigate risk.