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Retirement Planning Mistakes to Avoid

Planning for retirement is one of the most important things we do over the course of our financial lives. Just about everyone dreams of having a comfortable retirement, free from financial woes, where they can pursue their passions and spend time with the people they love.

Making that dream a reality takes hard work, discipline, and some careful planning, but if you do it right, it will set you up for financial freedom and security later in life and give you the peace of mind you need to truly enjoy your golden years.

Here are some of the most common retirement planning mistakes people make and how to avoid them.

Relying Too Heavily on Social Security

Some people incorrectly assume that once they reach a certain age, they'll be able to retire comfortably on Social Security alone. Unfortunately, that's very rarely the case. Setting yourself up to have a comfortable retirement means planning ahead, saving money, and developing a comprehensive retirement strategy during your working years.

Social Security shouldn’t be overlooked as a source of retirement income, but it shouldn’t be your whole strategy. As a general rule, retirees need to replace at least 70% of their pre-retirement income to live comfortably; on average, social security only replaces about 40%. That means you’ll need to have other sources of retirement income, such as 401(k)s, IRAs, and other savings and investments.

Waiting Too Long to Get Started

When it comes to saving for retirement, the earlier you start, the better. Even if you’re not able to max out your contributions to begin with, it’s better to contribute something than to contribute nothing. That’s because the longer your money is invested, the longer it will have to grow. Thanks to compound interest, even a small investment can turn into a substantial amount of money over time.

It’s generally a good idea to put at least 10 to 15% of your total income toward retirement savings during your working years – more if you can. And be strategic about where you’re putting your money, as well. If your employer offers 401(k) matching, take advantage of it and save there first.

Poor Tax Planning

Proper tax planning is an important part of any retirement plan. Many sources of retirement income are taxable, and it’s important to plan ahead and be strategic with your investments and contributions to make sure you’re minimizing your overall tax burden.

Depending on your income, you may need to pay taxes on your Social Security, and most pensions are also taxable. Any withdrawals from traditional IRAs and 401(k)s are also subject to taxation.

If you anticipate being in a higher tax bracket once you retire, a Roth IRA or Roth 401(k) may be your best bet, since your contributions will be taxed now rather than when you make withdrawals during retirement. On the other hand, if you’re in a high tax bracket now and expect your income to go down when you retire, you’re likely better off with a traditional IRA or 401(k).

Underestimating Healthcare Costs

Because many people get their health insurance through their employer, most choose to wait until they’re at least 65 to retire, since that’s when Medicare becomes available. Given the high cost of health insurance, this is usually a very good decision.

However, there’s a common misconception that Medicare covers all of retirees’ healthcare costs. In reality, it only covers about 80%. Current estimates suggest that the average couple will incur approximately $285,000 in healthcare costs over the course of their retirement, and that doesn’t include the cost of long-term care.

One option is to open a health savings account (HSA), which allows you to save money on a pre-tax basis for eligible medical expenses, deductibles, prescriptions, co-insurance, and dental care. Once you turn 65, you can withdraw money from an HSA for any reason with no penalty, though it may be subject to income tax if you use it for non-medical purposes.

Withdrawing Money Early

“Borrowing” money from your retirement savings can be very tempting, especially if you’re short on cash. But unless it’s an emergency, it’s best to avoid withdrawing money from a 401(k) or IRA until you retire. If you’re under the age of 59 ½, any money you withdraw will be subject to a 10% penalty, and will also be subject to income tax.

It’s never a good idea to treat your retirement fund like a normal savings account. Not only are you withdrawing a chunk of money (and paying a penalty for doing so), but you’re also giving up the opportunity to have that money grow over time from compound interest. It may be a few hundred dollars right now, but depending on how many more working years you have, it could turn into thousands by the time you retire.

Looking for Ways to Improve Your Retirement Strategy?

Are you on the right track? Could you benefit from meeting with a financial advisor to help you outline your goals and develop a comprehensive, long-term strategy for retirement? Are you currently approaching retirement and wondering if you’re ready now or if you’re better off waiting another year or two?

Whatever your situation, the team of financial professionals at Chatterton & Associates are here to help. Contact us today to get started.


The Team at Chatterton & Associates

Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc., nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

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