Getting to retirement is a lifelong journey. Not only is there a logistical wait involved in aging into this phase of modern living, but there's the integral financial elements to consider, too. No one arrives at a stable retirement without planning and working toward this goal, often for most if not all of their working life. The money management aspect of retirement is more important than most will want to admit. Relaxing and enjoying the days to their fullest without having to worry about paying the bills or getting to work on time is the goal for plenty, but the reality is that
your retirement lifestyle will likely determine its success
.
The value of saving
with the help of a Roth IRA
and other tax-advantaged retirement investment vehicles is well-established. If you don't save enough to support yourself, leaving the working life behind can be tricky if not impossible. There's no getting around this barrier to entry, but the work isn't done once you hit your targets and submit your paperwork to
start drawing Social Security checks
. Mistakes made early on are often far more visible, and therefore they can be easier to address and correct. After you retire, there remain pitfalls and setback opportunities that can spell disaster for your finances, too. These are some of the most important mistakes that workers and retirees alike will need to plan around if they want to avoid the potential nightmare scenario of running out of money to continue funding their life after working.
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Retiring early
The first and perhaps most obvious problem that retirees run into involves retiring too early. The reality is that there's no singular, correct way to plan for retirement, or a guide for when to retire. Of course, in more broad strokes it might be said that you should retire when you are financially capable. But what that means will be unique for everyone. Even so, some workers might consider full retirement age to be a guiding light. In the United States that age is 67, although it's been inching up toward that figure based on birth year for over a decade and could change again in the future. Another important age is 62. When you hit this mark you can start drawing Social Security benefits, but this will come at a reduced rate, pegged at 70% of your full benefit amount. Just because you can start drawing these monthly retirement income checks doesn't mean you should though. You might also
consider waiting to increase their value
.
In another way, the median income today for an American worker is approximately $62,000. Experts suggest that to retire comfortably, you need about 75% of your pre-retirement income. With Social Security checks covering up to 40% of this amount, this leaves an annual gap of nearly $22,000 (at minimum) that your savings will have to cover — $1,800 per month. At a 5% withdrawal rate, this means you would need at least $434,000 in your retirement account to support the math in this example.
Banking on retiring as late as possible or continuing to work during retirement
On the opposite end of the spectrum, it's also possible to get your retirement planning wrong by anticipating additional working years or the availability of part-time work that suits your schedule and experience. Some planners will seek to remain in the workforce for as long as possible. But banking on your ability to continue working, especially if you ply your trade in a physically demanding workspace like construction or fishing, can leave you in a tough spot when you begin to get older. Those in manufacturing, agricultural fields, and many other job areas that require physical strength and performance become increasingly challenging as you age. No matter the work you do, it can be worthwhile to delay your retirement for a few additional years in order to put off the time at which your investment portfolio needs to kick in to support you financially. But failing to allow yourself some wiggle room can make for numerous hard years of work after your mind and body are ready for a rest.
Having the option to delay your retirement is a great way to supercharge your finances, but needing to stay working can have disastrous implications. Another problem area comes in the form of a necessity to keep working in a part-time role. It's true that leaving the workforce is a far more intense mental challenge than most will expect, and working part time can help ease this transition. But assuming you'll be able to find work is yet another stumbling block waiting to trip you up.
Waiting to start saving for retirement
Saving for retirement isn't something you can put off. The
The best time to begin this habit is in your 20s
. However, even if you haven't, it's never too late to start. Saving for retirement is something that benefits you exponentially with the value of time and compounding interest on your side. There are no guarantees in this life, but the market has set a century-long precedent in which value continues to increase as time progresses. The market as a whole has expanded significantly since its creation, and even when accounting for inflation the S&P 500 exhibits an annualized return of roughly 6.5%.
The longer you wait, the more opportunity you miss out on to take advantage of long term growth. The reality is that it doesn't take fancy footwork or killer investment strategies to grow a sizable nest egg that can support you in retirement. The only thing you need to do is invest consistently and place your money in growth assets. ETFs do a fantastic job of evening out the risk and reward landscape. They're boring, and they'll bring you exactly what you need as long as you continue prioritizing your savings and leave the strategy to do its work. Invest early and continue to set money aside for your entire career, and there's a good chance that your money can actually outlive you.
Spending too much on your adult children
Many parents want to support their children, even after they've left the nest. This urge to support loved ones is powerful and natural. On the whole, there's nothing wrong with offering a helping hand whenever you can and want to. But the key here is ability. Retirees live on a fixed income. They don't have the ability to shrink certain discretionary spending areas or seek out a new job to increase their salary figure. Of course, a retiree has the ability to draw out additional capital from their investment portfolio to cover large expenses, but this is a slippery slope that can quickly decimate its long term stability. Sometimes this is unavoidable. If you need cash to pay for medical expenses or have to foot the bill for unexpected home repairs on your own, this may be the best approach. But paying for something to support your adult children doesn't really fall under that category.
Ransacking your retirement portfolio in order to help one of your children pay for something they want can ultimately leave you in an increasingly vulnerable financial position. It's also worth noting that adult children shouldn't count on retired parents to support big-ticket items. If you do want to offer help, this support should only come when it won't fundamentally alter your financial status in a negative way. For many, these kinds of helping hands can backfire and deliver long-term instability that is difficult if not impossible to recover from.
Shifting too aggressively out of growth assets
As you age, it's important to reevaluate your portfolio balance and move away from riskier investments. As you approach retirement, your portfolio should focus on strategies for protecting principal rather than aggressive growth. The time to grow your portfolio is during your younger years, and when the time comes for this priority to shift and you begin withdrawing money from it, you'll need to focus on preventing these assets from losing value or fluctuating. Growth-oriented investments can be volatile, and a sudden drop in value in the short term is a far more dangerous situation for a retired person than for a 30-year-old who is still decades away from this change in lifestyle.
However, growth assets still occupy an important position in a retired investor's outlook. Someone seeking to totally eradicate volatility from their portfolio might withdraw everything and place it in bonds or a savings account to protect the investment from stock market movements. But this fails to take into consideration the reality that your portfolio still needs to grow, albeit at a modest pace, in order to keep up with inflation, among other financial realities.
Forgetting about tax implications
Tax implications follow consumers around wherever they go. When you buy something in a store, you have to pay sales tax; and when you withdraw funds from investment accounts, there's a tax implication to be considered here, too. Throughout your savings journey, it's critically important to keep focused on the tax liabilities surrounding any strategy you utilize. Many savers pour money into their 401(k) account in order to
take advantage of employer match opportunities
. This is free money that can supercharge your ability to save for retirement. But your 401(k) account uses pre-tax dollars. This means that when you withdraw funds from the account you'll pay tax on the distributions as if they were regular income. On the other hand, your Roth IRA account is funded with post-tax money. The government treats distributions from a Roth as if the entire sum of money was always yours, even if you have somehow miraculously turned a single dollar into a gigantic portfolio and almost none of the value was actually deposited by you.
This leads retirees to an important crossroads. Withdrawing money from accounts that you'll need to pay tax on leads to additional costs later in life. More importantly, the more you withdraw from these kinds of accounts, the more tax you'll pay as you move up through the tax brackets. In order to minimize your liability, utilizing a blend of accounts is typically in your best interest. This allows you to take advantage of the perks of each sort of investment vehicle while mixing and matching distributions later on to actively manage your tax liability.
Carrying debts into retirement
It's critically important to discharge every debt you can before you stop drawing your paycheck. This isn't always going to be the case, and sometimes you may consider moving and taking on a new mortgage as you prepare for retirement or after leaving the workforce. In some cases this might be the best approach, but one debt product that should be totally off-limits involves credit cards. Credit card debt is the most expensive borrowing option on the table in almost all circumstances.
Carrying balances over from month to month can become exponentially expensive for those just trying to get by. Add to this the already challenging transition from financing your life via monthly salary checks to covering expenses from your savings portfolio, and you're looking at a stark road ahead. Carrying credit card debt into retirement is a great way to whittle away your nest egg while paying for nothing of genuine value to your life. It might be a hard pill to swallow, but it's crucially important to get rid of this kind of debt before you retire. Even if it means delaying your exit by a year or more, carrying credit card debt into retirement is a great way to find yourself running out of money in a hurry. It should be avoided at all costs.
Slowing your contributions because you're on track or ahead of your goals
One area of contention that some savers find themselves experiencing is actually a good problem to have. Sometimes, the market will be good to you and with the help of generous growth you might find yourself significantly ahead of interim goals you've set for your finances and future. It might be tempting to slow your contributions or pause them for a short period of time in order to leverage your cash flow for other necessities or even splurge opportunities. In no uncertain terms, this is a mistake. There are a number of factors working against you as you continue your voyage through the working life. For one thing, inflation is a constant enemy that can't be ignored. It averages around 2.5% annually, but all kinds of financial circumstances come together to push this figure northward on occasion. The effects of painful inflation have been on display recently, in fact. In retirement, your portfolio has to support you even through these cost of living increases. Therefore, just based on inflation alone you're almost certainly going to need more money set aside than you expect.
Beyond this constant combatant, retirees frequently have to deal with other additional expenses that weren't a part of their earlier lifestyle. As you age, the likelihood of needing expensive medical care increases. From visits to the doctor to an uptick in prescription medication requirements, your money will have to support all kinds of sudden medical requirements. The more you save the more comfortable you'll be later on in life when these surprises inevitably make their way into the picture.
Discounting the trends in life expectancy
In addition to increased medical costs coming with advanced age, it's important to realize that you're probably going to live longer than you expect. The pandemic years shortened life expectancy as the biggest two-year drop since the 1920s, but on the whole Americans are living longer than ever and this trend is only going to continue on its path into the future. As medical technology improves and other lifestyle elements come together to help support healthier living and better preventative care options, people will continue to live longer and longer.
On a practical level, this means that your money is likely going to have to support you for longer than you expect. This means that estimates you've made on how much you need to have invested by the time you retire are probably based on outdated expectations for how long you'll live. Many people will have the best of intentions when it comes to saving for retirement and put money aside diligently. However, if your calculations are based on math that doesn't add up to your ever-evolving life expectancy, you may be saving at a rate that's already too pedestrian to hit the targets you should have created for your future.
Taking early distributions from an IRA or borrowing from your 401(k)
It is actually possible to withdraw money early from your IRA and 401(k) accounts. It may not seem like something you can do when setting them up, considering all the language about taking distributions after you turn 59 ½. But early withdrawals are entirely possible, and come with some significant penalties. Aside from a few niche scenarios, taking money from an IRA account will expose you to capital gains taxes at the regular rate as well as a 10% penalty on top. When it comes to your 401(k), on the other hand, borrowing from its coffers is possible with slightly less doom and gloom involved. However, just because you can take money from these accounts doesn't mean you should. In fact, this should be an avenue of last resort if even considered at all.
The problem with taking early distributions is that you strip your portfolio of its ability to continue growing at an exponential rate. This capital is no longer working for you with the benefit of time on your side. Importantly, because these accounts have contribution caps that reset annually, it can be impossible to build your account back up to the level it started at before you tapped into its value. There's no way to earn extra money with a side hustle and deposit more into the account if you're already contributing to it at your maximum volume, for instance. These actions should only be taken in a genuine financial emergency with no other alternatives available.
Borrowing against the value of your home
The final mistake that retirees can make involves their home. The financial peculiarities of real estate are everywhere. In some cases, it can make complete sense to pay off your home as quickly as possible and become mortgage-free years ahead of the anticipated payoff schedule. Other borrowers will want to refinance their mortgage every few years to continue extracting value from their home in order to pay for other essential expenses. As is the case with many other financial situations, there is no one-size-fits-all approach for homeowners. However, generally speaking, it is not a good idea for retired homeowners to refinance their house or take out a new loan with this real estate asset as collateral. Leveraging the value of your property can be extremely useful, even in retirement. But with a fixed income and a reliance on the survival of your investment portfolio supporting your financial mobility, taking out a new and significant loan of any kind can introduce serious uncertainty and vulnerability into your life.
The problems only worsen when that vulnerability is tied to the place you call home. If your finances go wrong and you fail to meet the repayment terms, you might find yourself facing foreclosure. The threat of losing a home is huge for anyone. But for retirees, this is a much bigger issue. It might be difficult to find a new place to live that meets your physical needs in retirement, not to mention the routine and schedule that retirees often depend on.
Read the
original article on Money Digest
.
