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How to Manage Retirement Funds and Avoid Mistakes

Mistakes for Retirement

Being realistic about your plans and thinking ahead can help you avoid the worst retirement mistakes. Retirement preparation is a complicated process, and it’s easy to make the wrong financial decisions. According to the Federal Reserve, 40% of non-retired adults believe they are on track to save for retirement. 60% of those who feel their retirement isn’t on track didn’t set out to sabotage it or not fund it.

Here are 15 financial and retirement mistakes you can avoid to start (or continue) your retirement journey if you’re one of the 60% not on track.

1. Inadequate planning.

When you retire, how do you envision it? Unless you know, you will be unprepared for retirement and overlook the chance to envision the retirement of your dreams. Retirement planning begins long before you collect your last paycheck and begin your leisure lifestyle.

Here’s what needs to be done:

  • Consider a few options. What is your ideal place to live? How will you spend your days? What is your preferred length of employment?
  • Make a budget for retirement. Depending on your situation, you may need to reduce expenses, create more income, postpone retirement or adjust your retirement plan.
  • Make sure you find out how much (or how little) you’ll receive from Social Security, pensions, and other retirement benefits early and often.

2. Not having a retirement timeline.

No matter how far off your retirement is, it is never too early to begin planning and saving. Nevertheless, you will receive different advice and take different actions as you approach retirement.

Your retirement date should come into focus when you approach five to ten years from now. “I did this for myself when I turned 52 and suddenly realized I’m on a 10-year clock,” says John Knowles, lead business growth strategy consultant with Wells Fargo Wealth & Investment Management.

You can get organized by establishing a timeline between now and the planned date. Here are a few questions to think about:

  • Do you still have a mortgage?
  • Is it your intention to move?
  • Do you think your lifestyle might change as a result?
  • Are you prepared to cover those costs?

Your advisor and you can adjust your retirement planning strategy based on the answers to these and other questions.

Be prepared for the possibility of retiring earlier than you anticipated as well. And, are you prepared to retire unexpectedly? Keeping this in mind, you may want to have your advisor review your plan.

As an example, half of adults 55 and older reported themselves retired at the end of 2021 after the pandemic spiked during the first years.

3. Missing the match.

Despite the fact that you may feel you have insufficient money to save in a 401(k), don’t turn down the company’s matching contributions. Matching means your employer will contribute at least a certain percentage of your salary to your 401(k), usually based on your income.

“Many 401(k)s have a 3% of compensation employer match or greater, so if you do not defer at least this amount, you are simply choosing to turn away free money,” says Sathya Chey, co-founder and managing partner at Arise Private Wealth.

You should still consider investing even if your employer does not match your contributions, since 401(k)s have structural benefits, for example, deferring taxes until withdrawal. The problem is that some people do not contribute at all, Chey adds.

“401(k) plans are such an easy, tax beneficial and typically low fee way of investing,” she adds.

4. Overbuying your company’s shares.

You may want to keep your 401(k) allocation to no more than 10 percent if your employer’s stock shares are an investment option. Why? Well, it has nothing to do with loyalty. Instead, you’re protecting your retirement funds. It’s important to remember that even the biggest of companies can go under — think of Enron, Lehman Brothers, Blockbuster, Texaco, and WorldCom.

If your salary is already dependent on your company’s fortunes, you should not have a sizable portion of your retirement savings based on the same.

5. Ignoring tax breaks.

Saving for retirement is encouraged by the IRS. As such, it would be foolish not to take advantage of the opportunity to save more while reducing your current taxes. When preparing your retirement budget, don’t forget to account for taxes.

The following should be done if you want to leverage these tax breaks:

  • Invest in retirement plans. The money you put into 401(k) plans and individual IRA accounts can grow tax-free. You can deduct the contributions from your current-year taxes. The money you withdraw in retirement, however, will be subject to income taxes.
  • Tax-deductible catch-up contributions can accelerate your retirement savings if you’re over 50.
  • Are you worried about being in a high tax bracket when you retire? Don’t wait to contribute to your Roth IRA. Roth IRAs are tax-free until retirement even though you don’t get a deduction when you contribute. After age 59 ½, you can withdraw your contributions without penalty and pull money out tax-free.

6. Getting rid of assets when the economy is in a downturn.

When the market declines, it may seem that you need to sell more assets to meet your retirement goals. However, you will end up with fewer shares and your portfolio will be less able to recover in the event that the market rallies. What’s more, a steep or prolonged decline makes it even more difficult to recover.

Then again, you may not need your portfolio to last as long or grow as fast to fund a long retirement later on. As a result, you may be in much better financial shape to fund withdrawals during retirement.

As an investor, what can you do? Instead of panicking, take the following steps:

  • Make adjustments to your allocation. Move some funds into investments that will be more resistant to market turbulence. To help fund expenses, retirees should keep a portion of their retirement portfolio in cash or cash alternatives. In addition, consider investing a portion of your money in less volatile investments, such as high-quality short-term bonds or short-term bond funds. As you approach retirement, reducing your risk can be critical, especially in times of downturn.
  • Adapt to changing circumstances. Spending plans need to remain flexible during a downturn, regardless of when it occurs. It is more likely that your portfolio will face a decline if you reduce your spending and/or delay large purchases.

7. You apply for Social Security benefits too early.

At age 62, you can apply for Social Security benefits. However, your benefit will be 30% lower than if you wait until you reach full retirement age (FRA).

It is possible to reduce your benefits if you decide to keep working if you elect to receive benefits before your FRA. Benefits are reduced by $1 for every $2 you earn above a specific threshold in 2023, which will be $21,240.

In short, if you don’t need the money right away, wait before applying. It is best to wait until age 70 to apply for retirement since your benefit will be about 32% higher than at FRA.

8. Inflation is underestimated.

In an era of high inflation, it’s crucial to understand how this might affect your retirement income. Simply put, inflation can erode your purchasing power in the long run, even at lower levels. For this reason, it should be taken into account in your retirement income strategy.

Is there a way to stay on track? To begin with, your financial advisor can help you develop a personalized strategy for investments and retirement income to help maintain your purchasing power.

For instance, that could include investing more in stocks with strong dividend growth histories. The reason? Your stock investment can be redeemed as dividends for cash. Furthermore, dividends are not guaranteed and taxes and inflation may affect them.

9. Taking money from your retirement account.

When you accumulate quite a bit of retirement money, you may be tempted to spend it before you retire. That’s your money, so you should be able to use it however you like.

The temptation must be resisted, however.

Retirement money should not only be used to finance your pre-retirement life. In addition, tax-deferred withdrawals from 401(k)s and traditional IRAs will result in a large tax bill. Also, if you are under 55, you will also have to pay a 10% penalty.

Instead, explore other alternatives, such as:

  • Before withdrawing retirement funds, consult your tax advisor to find out how much you would owe in taxes.
  • Instead of withdrawing retirement funds, consider taking out a personal loan or home equity loan. Your nest egg can remain intact, even though interest will be paid.
  • In order to keep the Roth IRA tax benefits, work out a plan to repay as much as you can when withdrawing Roth IRA contributions for your child’s education.

10. Being too conservative when investing.

You should consider investing in stocks if you plan on putting your money to work for a long time. As well as helping you beat inflation, stocks can increase your purchasing power because they can yield high returns.

Sure, stocks can fluctuate considerably from one day to the next. In the past, however, the S&P 500 has produced average annual returns of about 10 percent. Not every year, but over time on average. Getting that kind of return anywhere else is difficult.

Despite being regarded as too risky by many savers, experts say avoiding stocks entirely is a grave restirement mistake. Ideally, savers should balance higher-risk assets such as index funds with lower-risk assets, striking a balance between the two.

In general, experts recommend investing most of your assets in stocks, since they provide the best returns in the long run. You can also take advantage of stocks’ attractive long-term performance by investing over a long investment horizon, which gives you more time to ride out market fluctuations.

To make sure that your money will be there when you need it, advisors recommend investing in more-conservative investments near retirement.

In addition, if you don’t invest in stocks, you may end up outliving your savings unless you need that much return.

11. Getting yourself into debt.

Both before and after retirement, it is wise to reduce debt and maintain good credit. In addition to keeping your expenses low, monitoring your credit score and improving it will ensure you will be able to access favorable terms and rates if you ever need credit.

If you haven’t done so yet, make sure that you:

  • Before you stop working, pay off your credit cards and other consumer debt.
  • Make sure you are careful when using credit. Using a credit card after retirement is still possible, but spending beyond your means can be problematic.
  • To reduce your debt load in retirement, pay off large debts such as your mortgage or car loan. For example, explore side hustles or ways to earn a passive income.

12. Underestimating medical expenses.

For many retirees, Medicare is an essential program. However, it wasn’t designed to cover all healthcare costs. As such, it may become difficult to afford covered services in some cases due to premiums and copays.

Additionally, Medicare does not cover:

  • Deductibles and copayments
  • Expenses associated with dental, vision, and hearing care
  • The cost of long-term nursing home care

If you need help understanding retirement health care’s financial aspects and recommending solutions, your financial advisor can assist you.

You may also want to look into a long-term care annuity rider. Long-term care riders are optional benefits that you can add to an annuity contract to help cover long-term care expenses. Benefits can be accessed right away, and they can be passed on to beneficiaries if you do not need them.

13. Not rebalancing your portfolio.

As market conditions change or as you approach retirement, you should rebalance your portfolio. Ideally, this should be done quarterly or annually.

Additionally, when you are close to your last day of work, you should reduce your exposure to equities. Instead, you should increase your bond holdings.

14. Paying high fees.

It may not seem like much to pay 1 percent annually for an investment plan. However, it can result in tens of thousands of dollars in expenses over time. It is most likely that you will pay these fees on mutual funds because of their expense ratio.

Imagine investing $10,000 each year for 30 years, starting with $10,000 and increasing it by $10,000 each year. During the next 30 years, you will earn an average return of 7 percent annually. Over that period, you will have to pay nearly $133,000 if you choose a fund that charges just 1 percent. In 40 years, the cost rises to over $328,500.

It’s not just the 1 percent annual cost you’re giving up. There is also a loss of compounding ability when you pay out that money. For a $10,000 investment, a 1 percent fee would be $100 in the first year. It is that $100 compounding at 7 percent for decades that accounts for the real cost.

Compared to this, some funds charge less than 0.1 percent, or even zero, on the S&P 500 index. This low-cost fund costs just under $19,000 over 30 years, and more than $56,000 over 40 years. It is still a lot of money, but it is nothing compared to the 1 percent fund.

In terms of expenses, a fund’s cost is one of the easiest to control for investors. In the case of 401(k) investments, the information must be provided to you. For IRAs and taxable accounts, your broker can provide you with this information if you are investing on your own.

15. The cost and length of retirement are underestimated.

Here are some crucial factors to consider when planning your retirement:

  • A long life. Retirement can last a quarter century or more if you retire around 65. Clients are now encouraged to save for a minimum of 25 to 30 years by many advisors.
  • The effects of inflation and taxes. Even when inflation was mild, living costs have more than doubled. You should also consider the taxes you will pay on your retirement distributions.
  • Health care expenses. Again, there may be expenses associated with supplemental insurance, prescription drugs, and nursing home care, even if you have Medicare.
  • Cost-of-living shock. In retirement, most people require at least 80 percent of their income before retiring.


What is the amount you will need to save for retirement?

Your answer to this question depends on the kind of retirement lifestyle you want and how long you want it to last.

It is generally recommended that you have 70% to 90% of your pre-retirement income to spend in retirement each year. Analyze your current lifestyle and budget and determine how retirement will affect your budget and how it will impact your lifestyle. If you downsize, take into account reduced living and tax expenses. On the flip side, expect increased healthcare and inflation expenses.

As a potential source of liquidity, your home should be included in your calculations when you retire.

Do you need to save a certain amount of money today?

You should typically save 10–20% of your income throughout your working years if you want to replace 80% of your pre-retirement income.

You can start answering this question with general figures like these. However, if you want to plan your retirement properly, you need to develop a more accurate model. This can be accomplished with the help of your customized retirement budget.

When can I start receiving Social Security benefits?

It is possible to receive Social Security benefits as early as 62 years old. If you start receiving benefits before you reach full retirement age, however, your benefit will be reduced. As an example, if you turn 62 in 2023, your benefit would be about 30% lower than when you reach full retirement age.

If I withdraw from my 401(k) before the age of 50, will I have to pay a penalty?

Unless you qualify for hardship withdrawals, withdrawing funds before 59 ½, will incur a 10% IRS penalty. Withdrawals after that age are not subject to a penalty.

A few exceptions to this rule exist, such as the “Rule of 55,” which allows you to withdraw money from your 401(k) without incurring penalties when you turn 55 or later. Only the 401(k) at your current employer is affected, not one from a previous employer.

What are the most common retirement mistakes?

There are several retirement mistakes that you should be aware of, including not building a financial plan, not contributing to your 401(k), and not taking advantage of 401(k) matching. People often take Social Security distributions too early, fail to rebalance their portfolios to match their risk tolerance and spend excessively.

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