A quality retirement is achievable even if you don’t have a million-dollar salary or a brilliant investing mind. However, you do need to set goals and avoid potential pitfalls. Making a mistake won’t kill your retirement goals, but it can set your plans back and force you to work longer than you prefer. Here are four of the most common retirement mistakes you need to avoid when planning for life after work.
If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.
Failure to Devise a Sufficient Plan
Retirement planning is a tedious process, but it’s not something you can put off until later. The decisions you make now will have a large impact on your financial picture decades down the road. And if you decide NOT to plan? Well, that’s a decision that will likely come back to haunt you.
Counting on social security to fully fund your retirement costs isn’t a sufficient plan either. You’ll need some kind of nest egg to fall back on, especially if you have plans beyond watching TV all day. Consider the following questions:
- What are your goals for retirement?
- Do you want to travel, or simply spend time with grandkids?
- What if you have an accident—will you need long-term care?
- Who will manage your financial wishes if you become incapacitated?
Some of these ideas are uncomfortable to think about, but it’s even more uncomfortable to face them unprepared later down the road.
Not Taking Advantage of Compound Interest
Compound interest is a two-way street. If you have credit card debt, it can be a perpetual downpour that you can never seem to escape from. But if you start investing early, compound interest will be your best friend.
If you invest early, you not only have extra decades on your side, but you can afford to take on more risk in the market since you’ll have plenty of time to recover from any downturns. By allowing your nest egg to compound over a series of decades, you can prepare for retirement. Let’s face it, keeping your money in a savings account will only decay the purchasing power of your cash. You now have options like Target Date Funds, which automatically reduce your market risk as you get closer to retirement.
Neglecting Tax-Sheltered Accounts
Retirement is a win-win for everyone. A new generation can come in and build careers while older employees can hang up their boots and enjoy the last third of their life on their own terms. Retirement is such a win-win that the federal government helps boost our savings with tax-sheltered vehicles like 401(k) accounts and IRAs.
When investing in a 401(k), contributions are withdrawn from our paychecks before taxes hit. You can put up to $18,000 per year into a 401(k) account and you won’t pay taxes on the funds until you tap the account in retirement. An IRA is the same way, only with a lower $5,500 annual contribution limit. Then there’s the Roth IRA, which uses after-tax funds, but the investments have the possibility to grow completely tax-free. Utilize these tax shelters in order to increase your nest egg—there’s no need to give Uncle Sam any more than he’s owed.
Ignoring a 401(k) Match
If you work for a company that offers a 401(k) match and you aren’t taking advantage of it, you’re leaving free cash on the table that you can never get back. With a 401(k) match, your employer will offer to match a certain percentage of your contributions if you enroll in the program.
For example, you might have a 401(k) plan with a 3% match, meaning if you contribute 3% of your salary to the account, the employer will also pony up 3% to match. This is free money! You don’t need to sock 15% of your income away each year to retire successfully, but at least save up to the match percentage, even if you’re young and retirement is far from your radar.
Work With an Experienced Financial Advisor
These four common retirement mistakes are important to avoid! Retirement planning doesn’t need to be complex or sophisticated, but you need to know what you want out of retirement and how to maximize your nest egg. Always discuss your goals with a financial advisor and use their guidance to set up a winning plan. Letting go of your steady income can be scary, and there’s no shame in asking for assistance getting set up for post-paycheck life!