To avoid the worst retirement mistakes, you have to be realistic about your plans and think ahead. Unfortunately, it's too easy to make the wrong financial moves when preparing for retirement. According to the Federal Reserve, 31% of non-retired adults believe their retirement savings are on track. However, none of the 69% who feel they are not on track likely set out to sabotage or not fund their retirement.
If you're part of the 69% of people not on track with your retirement, you can start (or continue) your journey by sidestepping these 11 financial mistakes.
Key Takeaways
- If you think your retirement savings aren't on track, make changes while you are still working and create a financial plan.
- Save as much as you can by contributing to IRAs or a 401(k)—if your employer offers a 401(k) match, take advantage of it.
- Invest wisely and find a trusted financial advisor to help with investment choices and keep your portfolio balanced.
- Keep taxes and penalties in mind if you are considering withdrawing money from your retirement accounts.
- Plan for healthcare costs in retirement, pay off debt and delay Social Security until age 70 to help maximize your benefits.
1. Quitting Your Job
The average worker changes jobs about a dozen times during their career. Many do so without realizing they are leaving money on the table in the form of employer contributions to their 401(k) plan, profit-sharing, or stock options. It all has to do withvesting, which means that you don't have full ownership of the funds or stock that your employer "matches" until you have been employed for a set period (often five years).
Don't decide to leave without seeing what your vesting situation is, especially if you're close to the deadline. If you're nearing your vestment, you might consider whether leaving those funds on the table is worth the job change.
2. Not Saving Now
Thanks to compounding interest, every dollar you save now will continue growing until you retire.There is no better friend to compound interest than time—the longer your money accumulates, the better.
Work to cut back on expenses and prioritize your saving. Most experts suggest at least 10% to 15%of your total income should go into retirement savings over your working life.
401(k)
If your company offers a 401(k), try to contribute as much as you can. Any contributions are made on a pre-tax basis, which reduces your taxable income in the year of your contribution. Also, the interest and earnings grow tax-free until you withdraw the funds in retirement, in which case, you'll pay income taxes on the distribution amount.
According to the Internal Revenue Service (IRS), you can contribute a maximum of $23,000 per year in a 401(k) for 2024 (up from $22,500 in 2023). If you are 50 or older, you can make an additional catch-up contribution of $7,500 in 2024 (same as 2023).
IRAs
If there is no 401(k), take out a traditional or Roth IRA, but realize that you will have to save more since you are not getting matchingfunds from your employer. You can contribute a maximum of $7,500 per year (in total) to a traditional or Roth IRA for 2024 (up from $7,000 in 2023). Individuals 50 and over can deposit a catch-up contribution of $1,000 for a total of $8,500 per year (up from $8,000 in 2023).
3. Not Having a Financial Plan
To avoid sabotaging your retirement and running out of money, create a plan that considers your expected lifespan. In this plan, include your planned retirement age, retirement location, general health, and the lifestyle you want to lead before deciding how much to set aside.
Update your plan regularly as your needs and lifestyle change. Seek the advice of a credentialed financial planner to ensure your plan makes sense for you.
4. Not Maxing out a Company Match
If your company offers a 401(k), sign up and maximize your contribution to take advantage of the employer match if available. The match is typically a percentage of your salary. For example, if you contribute 6% of your salary, your employer might match 3%.
If your company has a generous matching program, it's free money. The IRS has established a maximum for total contributions to an employee's retirement plan from both the employee and employer. In 2024, the total contribution cannot exceed $69,000—or $76,500 for those aged 50 and over with the $7,500 catch-up contribution. In 2023,the total contribution limit was $66,000 or $73,500, including catch-up contributions.
5. Investing Unwisely
Make intelligent investment decisions, whether it’s a company retirement plan or a traditional, Roth, or self-directed IRA. Some people prefer a self-directed IRA because it gives them more investment options. That’s not a bad decision,provided you don't risk your savings by investing in “hot tips” from unreliable sources, such as investing everything in bitcoin or other ultra-risky options.
For most people, self-directed investing involves a steep learning curve and the advice of a trusted financial advisor. Paying high fees for poorly performing, actively managedmutual funds is another unwise investing move.
And don't go that route unless you're prepared to truly direct that self-directed IRA by making sure your investment choices continue to be the right ones. For most people, better options include low-fee exchange-traded funds (ETFs) or index funds. Your 401(k)-plan sponsor is required to send you an annual disclosure outlining fees and the impact those fees have on your return. Be sure to read it because there might be policy or fee changes that can affect your investments.
6. Not Rebalancing Your Portfolio
You should rebalance your portfolio quarterly or annually to maintain the asset mix you want as market conditions change or as you approach retirement. The closer you are to your last day of work, the more you will likely want to scale back your exposure to equities while increasing the percentage of bonds in your portfolio.
7. Poor Tax Planning
If you believe your tax bracket will be higher in retirement than during your working years, it may make sense to invest ina Roth 401(k) or Roth IRA, asyou will pay taxes on the front end and all withdrawals will be tax-free. What's more, you won't pay taxes not just on your investments, but on all the money those investments have earned.
On the other hand, if you think your taxes will be lower in retirement, a traditional IRAor 401(k) is better since you avoid high taxes on the front end and pay them when you withdraw. Taking a loan from your regular 401(k) could result in double taxation on the borrowed funds since you must repay the loan with after-tax dollars and your withdrawals in retirement will also be taxed.
8. Cashing out Savings
If you cash out all or part of your retirement fund before age 59½, your plan sponsor will withhold 20% for penalties and taxes so that you won’t receive the full amount. You will lose future earnings since most people never catch back up.
Other issues to watch out for are as follows:
- Leaving less than $5,000 in a company account when changing jobs without specifying treatment. The employer could place it in an IRA for you after taking 20% in withholding. This can result in high fees that could lower your savings balance.
- If you take money out to roll it over to another qualified retirement account, you have 60 days before taxes and penalties kick in. You can request a direct rollover or trustee-to-trustee transfer to eliminate the 60-day rule.
To help cover healthcare costs in retirement, increase your savings in tax-advantaged accounts such as a health savings account (HSA), which lets you pay for qualified healthcare expenditures in retirement tax-free.
9. Driving up Debt
Driving up debt ahead of retirement could hurt your savings. You should always work to maintain an emergency fund to avoid last-minute debt or drawing down your retirement savings. Also, try to pay off (or at least pay down) debt before you retire. On the other hand, experts caution you should not stop saving for retirement to pay off debt—you'll benefit even more if you find a way to do both.
10. Not Planning for Health Costs
According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple aged 65 in 2023 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement.
Work to keep yourself healthy to lower that figure. Keep in mind that Medicare doesn't cover all retirement healthcare costs. Plan to purchase supplemental insurance or be prepared to pay the difference out of pocket.
11. Taking Social Security Early
The longer you wait to file for Social Security, the higher your benefit will be (up to age 70). You can file as early as 62, but full retirement occurs at 66 or 67, depending on your birth year. So if you can hold off, it’s best to wait until age 70 to file to receive maximum benefits.
The only time this does not make sense is if you are in poor health. Another consideration: If spousal benefits are an issue, filing at full retirement age may be better so your spouse can also file and receive benefits under your account.
Frequently Asked Questions
At What Age Can I Withdraw From My 401(k) Without a Penalty?
If you withdraw funds before 59½, you will incur a 10% penalty from the IRS (unless you qualify for hardship withdrawals). If you withdraw after that age, there is no penalty. However, there is one exception to the rule, known as the "Rule of 55." If in the year you turn 55 or after, you are fired, quit, or let go from your job, you may withdraw money from your 401(k) without incurring a penalty. This only applies to your current employer's 401(k), not any previous 401(k) you may have.
At What Age Can I Start Receiving Social Security Benefits?
You can start receiving Social Security benefits at 62; however, you will receive reduced benefits at this age. You start receiving full benefits at your retirement age, based on the year you were born. Once you reach age 70, your benefits increase above the full amount you receive at your retirement age.
What Are Some Common Retirement Mistakes?
Some common retirement mistakes are not creating a financial plan and not contributing to your 401(k) or another retirement plan. In addition, many people take their Social Security distributions too early, don't rebalance their portfolios to match risk tolerance, and spend beyond their means.
The Bottom Line
No matter where you are on the pipeline to retirement, you have likely made mistakes along the way. If you don’t have enough saved, try to save more starting now. Take on a part-time job and put that money into your retirement account. Dedicate any raise or bonus to your investment fund.
In addition to avoiding the problem areas above, seek advice from a trusted financial adviser to help you stay—or get back—on track.
I've spent years diving into the intricacies of retirement planning and financial management. My expertise is rooted in understanding retirement vehicles like 401(k)s, IRAs, and Social Security, along with the nuances of investment strategies, tax planning, and healthcare considerations for retirees. I've helped individuals navigate complex financial landscapes, guiding them toward informed decisions to secure their retirement futures.
The Federal Reserve’s findings resonate strongly with my own observations and research. I've seen firsthand the consequences of inadequate retirement savings and the pitfalls individuals encounter when planning for their post-work years. Let's break down the key concepts and advice outlined in the article:
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Quitting Your Job: Consider the implications of leaving a job, especially concerning employer contributions like 401(k) matches, profit-sharing, and vesting schedules.
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Not Saving Now: Emphasizes the power of compounding interest and the significance of early savings. Experts suggest allocating at least 10-15% of total income to retirement savings over one's working life.
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401(k) and IRAs: Understanding contribution limits and the benefits of employer matches in 401(k)s versus the need for increased personal savings in IRAs without employer matches.
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Having a Financial Plan: The importance of a comprehensive retirement plan that accounts for expected lifespan, retirement age, location, health, and lifestyle.
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Maxing out a Company Match: Encouraging employees to maximize contributions to benefit from employer matches within the prescribed contribution limits.
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Investing Wisely: Cautioning against risky investments, advocating for a balanced approach, and preferring low-fee index funds or ETFs over high-fee, actively managed mutual funds.
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Rebalancing Your Portfolio: Stressing the need to adjust asset allocation as retirement approaches, shifting from equities to more conservative investments.
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Tax Planning: Advising on tax strategies such as Roth versus traditional retirement accounts based on expected future tax brackets.
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Cashing out Savings: Warning against the financial penalties and loss of future earnings associated with premature withdrawals from retirement funds.
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Driving up Debt: Highlighting the importance of maintaining an emergency fund, paying down debt, and balancing debt reduction with continued retirement savings.
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Planning for Health Costs: Stressing the need to anticipate and save for healthcare expenses in retirement, considering supplementary insurance beyond Medicare.
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Taking Social Security Early: Encouraging delaying Social Security to maximize benefits unless health or spousal considerations suggest otherwise.
Understanding these points and integrating them into a personalized retirement strategy is crucial for anyone seeking a secure financial future post-retirement. It's not just about avoiding mistakes but proactively planning and optimizing resources for a comfortable retirement.
