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As you approach retirement age, it’s important to ensure your savings are in order.
With so many financial decisions and choices out there, however, it can be hard to decide what route to take when saving for retirement.
As a result, many people make mistakes along the way.
In this article, we’ll discuss some of people’s most common retirement savings mistakes and how to avoid them.
Whether you’re just getting started or have been managing your finances for a while now, take a few minutes to read through these tips, as they could save you from costly errors down the road!
#1. Delaying Retirement Contributions
The longer you wait to contribute to your retirement accounts, the less time your investments have to compound, resulting in a smaller retirement nest egg.
This means you need to save more money every month to have the same amount saved when you retire.
For example, if you save $200 a month for 30 years and earn 8% annually, you end up with close to $300,000 in savings.
But if you wait until you are 50 and only save that amount for 15 years, you end up with a little more than $70,000. To have close to $300K in 15 years, you need to save over $800 a month.
Also, delaying contributions means you miss out on employer-matching contributions, which can significantly boost your retirement savings.
This free money is one of the best reasons to contribute to your 401k plan in the first place.
#2. Stopping Retirement Contributions
Stopping saving for retirement can be just as costly as waiting to save. The good news, however, is if you have been saving for many years already, the impact won’t be as significant.
But any time you stop saving, you are costing yourself money. And what many people don’t realize is once you stop, it is hard to start back up again.
You might think you will pause your contributions for a few years while you pay for that new car.
But once you pay off the car, you will likely find another use for your money and not start putting it towards retirement.
A better solution would be to cut back, not cut off. Of course, the ideal scenario is to find another way to pay for what you need and not touch your contributions.
#3. Not Putting Money Into A Roth IRA
A Roth IRA is arguably one of the best ways to save for retirement. This is because your money grows tax-free.
Your money grows tax-deferred with a 401k plan or a traditional IRA. This means you only owe taxes on the money once you take it out of the account.
With a Roth IRA, there are zero taxes when you take the money out.
Also, with a 401k or traditional IRA, you are legally required to take the money out of the account once you reach a certain age.
This is because the government wants their money. But there is no requirement for a Roth.
#4. Taking Social Security Early
After working many years and paying into the system, it can be tempting to start drawing from your Social Security benefit as soon as possible.
But this can have a significant impact on your future finances.
If you were born before 1960, taking Social Security early means you get 25%-30% less per month for the rest of your life than waiting until retirement age.
This also means when benefits increase for cost of living adjustments, your increase will be 25-30% less.
Ideally, you wait until full retirement age to take benefits to not cost yourself a small fortune.
#5. Overpaying For Medical Care
The world of medical insurance is complicated, and sadly, seniors often overpay for care simply because they do not know what coverages are out there.
The best thing you can do is talk to a Medicare expert who can guide you through the jargon to get you the best plan for your needs.
But don’t just ask for advice from anyone. Talk to friends and family to see if they know anyone. Reach out to local support groups to see if they have referrals.
When you find someone, take your child with you or someone else to help you understand what the person is saying to make sure it makes sense for you and your needs.
#6. Paying For Adult Children
As parents, you want to help your children as much as possible. But some people go overboard and put their children first line.
Making them a priority when you are behind on retirement is a recipe for disaster.
This is because you will struggle financially when it comes time to retire. In the worst case, you have so little money that your children will have to help support you.
Now they have the added stress of ensuring you are well cared for.
#7. Doing Major Home Renovations
If your retirement savings are healthy and you don’t need to go into debt, home renovations can be a great way to improve your home. But if you are going into debt, this could spell disaster.
The reason is that you won’t have money coming in during your retirement years.
So not only are you relying on your savings to pay for things, but you now have the debt you must also repay, depleting your nest egg faster.
#8. Not Doing Any Tax Planning
Taxes can have a significant impact on your financial future. Because of this, it is critical you do some tax planning.
This will ensure you are contributing to the proper accounts, investing in the correct vehicles, and keeping as much money as you legally can.
While using a tax professional will cost you money, the money you save will more than offset this cost over the years.
#9. Investing In The Wrong Investments
As you get closer to retirement age, you must ensure your investments match your goals, risk tolerance, and time horizon.
While keeping the majority of your investments in equities might provide a greater return, the risk might be more than you should be taking.
At the same time, some people think they need to abandon equities altogether. The issue here is your money might not grow enough.
This is especially an issue as retirement lasts longer for many people.
#10. Underestimating Retirement
The final mistake many people make is not estimating how much retirement will cost and how long you will be retired.
There is an assumption that your spending will drastically decrease once you retire.
While you won’t spend money on clothes for work and other work-related things, you might spend more on eating out. Or you might pick up a new hobby.
While spending might decrease, there is a high likelihood it won’t drop by as much as you think.
Also, because of medical advances, more and more people are living longer. You might think that you are good if you have savings to last you until age 90.
But what happens if you live until 95 or 100? The last thing you want to do is run out of money and still have 5-10 years to live. At this age, returning to work is not an option, so how will you afford to live?
I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.