There’s no such thing as a perfect retirement plan, but there are certainly common mistakes you should avoid at all costs.
Although saving for retirement is obviously important, you’d be surprised by how many people are barely saving or not saving at all. Don’t risk having to work indefinitely by procrastinating on your retirement planning.
Retirement Mistakes Everyone Makes
Waiting for the ‘Perfect Moment’ to Start Saving
The last thing you want to do is reach retirement age with no savings. The problem with retirement is that we tend to think of it as a distant goal that we can always start saving for “later.” However, this mentality oftentimes leads people to push off retirement planning until their 40s and 50s. They’re then left with a smaller nest egg than if they’d taken advantage of the exponential growth potential of a 401K or IRA in their 20s, 30s or even teenage years.
There is simply no better time to start saving for retirement than right now. Whether you’re a home business owner, entry-level employee, or even a college student, saving now will give you plenty of time to grow your nest egg over the next few decades. Obviously Social Security won’t be enough for most of us, so be sure to include retirement savings in your monthly budget as soon as possible.
Not Maximizing 401K Contributions
There are many advantages to saving for retirement with a 401K. Many employers offer matched contributions up to 2-5% in many cases, which means a decent chunk of your retirement savings won’t even come out of your own paycheck. Fortunately, the GOP tax bill passed in late 2017 did not end up eliminating pretax deductions for 401K savings. That means you can still get access to fantastic tax breaks when you contribute as much as you possibly can to your 401K.
Since you can contribute up to $18,000 per year to a 401K, you should strive to get as close to the maximum amount as possible. Sure, $18,000 is a huge amount for anyone making less than six-figures, but if this option is available to you then you should try to take advantage of the short-term tax benefits and long-term retirement saving benefits of 401Ks.
Putting All Your Eggs in One Basket
Even if your employer offers a 401K to employees, you should still try to scope out other retirement options, such as a Roth IRA with a robo-advisor. Since you can withdraw Roth IRA funds tax-free during retirement, this avenue is particularly useful for folks who want a blend of tax-free and taxed retirement income when they’re 65+ years old.
Rather than putting all your eggs into your 401K or Roth IRA, consider both options. You might discover a better fund manager through either of these options, as well as lower fees, better returns and better tax advantages.
Although this may seem like spreading yourself thin when it comes to retirement planning, the mixed approach is incredibly beneficial in comparison to choosing one or the other and simply hoping for the best.
Underestimating Retirement Expenses
Don’t automatically assume you’ll downsize your lifestyle upon reaching retirement age. A variety of factors could prevent you from downsizing. There may be a poor housing market. Or, you may need extra space for storage or family members. So, you should try to overestimate your expense projections for your retirement years instead, especially if you’ll still be making mortgage payments.
Rather than assuming you’ll reduce your expenses during retirement, be proactive and look for ways to increase your income during retirement. You could accomplish this by renting out rooms in your home through Airbnb, driving for a ride-sharing service like Lyft or Uber, working a part-time job at an organization you love, pet-sitting, or any number of self-fulfilling work opportunities.
Stop Saving As Soon as You Retire
Did you know that you can make IRA contributions even after you retire? This is extremely important because we never know just how long we’ll live after retiring from our jobs. Even if you don’t have income from your full-time job anymore, you can still find other ways to make money during retirement. Contribute those funds to an IRA account. This way, you can live on your current savings while increasing your rates of return with ongoing account contributions.
Like most people, you’ll probably stumble along the way to retirement. Sometimes the markets will experience downturns, sometimes you’ll have to ditch a fund manager who’s bringing in poor returns on your investments, and some years you might not max out your retirement account contributions.
All of this is normal and okay. Letting problems persist by not saving, saving too little, or underestimating your expenses can lead to serious issues when you eventually retire.