Nearing retirement, your thoughts start to drift farther and farther away from the job at hand and closer to what you’ll be able to do in all that free time. You think of catching up on some reading, enjoying an afternoon on the back nine, or traveling the world. However, as you get closer and closer to your retirement party, it’s important to stop and assess your readiness for retirement. We’ve rounded up the four most common mistakes soon-to-be retirees make regarding their money. We want you to be prepared to make your transition into retirement a bit smoother.
Mistake #1: Neglecting To Create a Retirement Plan
Interestingly enough, in a 2019 Retirement Confidence Survey, 8 in 10 retirees said they were feeling confident that they’ll have enough to live a comfortable retirement. Yet, only 42% (or 4 in 10) have actually attempted to calculate how much money they’ll need in retirement.
The first (and one of the biggest) money mistakes any pre-retiree can make is neglecting to create a retirement plan prior to heading into retirement. Understanding how much you really need to retire before you reach retirement can give you time to adjust your savings strategies, portfolio allocations, or insurance products. Additionally, it can help you understand if your retirement expectations are going to be realistic or not.
Simply put, if you don’t understand how much you should have to retire comfortably, you won’t know if you’re on track.
Mistake #2: Waiting To Start Saving
Once you’ve created your retirement plan and discovered how much you need for retirement, it may become clearer why you shouldn’t delay the savings process. And while putting away a couple thousand now might feel hard to do, it’s important to remember how important these savings are. It is due to the principal of compound interest, your couple thousand now could potentially turn into tens of thousands in retirement. Obviously, the amount depends on how the markets perform, what you invest your money in, and how many years away you are from retirement. The best way to make this happen? Time. Give your money the years (or decades) it needs to collect interest and grow into what you’ll need in retirement.
Mistake #3: Underestimating Healthcare Costs
It is important not to underestimate health costs when planning for retirement. Those between the ages of 65 and 74 spend an average of $6,000 in healthcare costs annually. This amount does not include any type of long-term care.Whether that sounds like a lot to you or not, the number can certainly add up over time. These costs eat into your retirement savings, especially if an unexpected injury or illness occurs.
One way to help with the costs of healthcare is to understand your Medicare coverage and supplemental plan options. Once you’re eligible for Medicare, there is a 10% penalty added to the standard premium for every full 12-month period that you wait to sign up.
Mistake #4: Underutilizing Tax-Advantaged Accounts
Don’t underestimate the impact taxes can have on your income now and through retirement. Traditional and Roth IRA options can provide tax-advantaged opportunities for saving. They can make a difference in your retirement savings. Traditional retirement accounts reduce the amount of taxable income for working years. Roth IRA contributions are not deductible but then they are withdrawn from the account tax-free during retirement.
Even better, the contribution maximum for employee contributions to an employer-sponsored retirement account in 2020 is $19,500 plus an additional $6,500 for employees 50 or older. IRA contribution amount for 2020 is $6,000 with an additional $1,000 if you are 50 or older. That makes now an opportune time to begin catching up on your retirement plan contributions.
Preparing for retirement can bring about a mix of emotions. There is excitement to leave the workforce and anxiety about affording your ideal standard of living, just to name a couple. Plan now to help avoid common retirement pitfalls. Create peace of mind as you look forward to enjoying your years of retirement.
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