3 retirement planning mistakes that will haunt you for years to come


Halloween tries to scare you with ghosts and monsters, but often the real nightmares that keep us awake at night are much more mundane, like surprise bills or lack of money in retirement. These are real risks, but you can reduce the chances of them happening with careful planning now. Here are three retirement planning mistakes you absolutely want to avoid.

1. Delay saving

Retirement takes hold of you faster than you might think, and the longer you wait to start saving, the harder your task becomes. If your savings are only invested for a short time before you start spending the funds, you won’t have as much income to help cover your expenses. This means that you will have to set aside even more of your own money each month to reach your retirement savings goal.

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For example, if your goal is to save $ 1 million for your retirement at age 65, you will only need to save about $ 403 per month if you start at 25 and get an average annual rate of return. by 7%. You yourself will have contributed less than $ 200,000, which means that more than $ 800,000 of your $ 1 million would come from investment income.

But if you had waited up to 30 years to start saving, you would now have to save $ 582 per month to reach your goal, assuming the same annual rate of return. Just by waiting five years to start saving, you’ve now cost yourself $ 51,000 more because you won’t have as much investment income to help you.

This problem only gets worse as you wait, so it’s important to start saving for retirement as soon as you can. Even if you can only set aside a few dollars each week, it’s a good start. Then increase your contributions as soon as you can.

2. Make early withdrawals from the retirement account

The money you put in a retirement account is usually locked up until you hit 59 1/2. While no one will prevent you from withdrawing the money earlier, the government will impose a 10% early withdrawal penalty on you if you withdraw the money before that age. You might also owe taxes if the money comes from a tax-deferred account.

There are ways around the penalties. For example, if you use the money for a large medical expense, higher education, or the purchase of a first home, you won’t have to pay the 10% early withdrawal penalty, although you may still owe taxes on that money.

But even if you don’t face penalties, you replenish your retirement savings by making an early withdrawal. Just like in our example above, you will need to save more money each month in order to make up for the amount you have withdrawn. This will make it much harder to reach your retirement savings goal.

Look for other ways to get the money you need before resorting to early withdrawals from your retirement account. Take a look at loans or see if you can save the money you need by cutting back on spending in other areas of your life. And build an emergency fund if you don’t have one so you don’t have to dip into your retirement savings to pay unexpected bills.

3. Choosing the wrong time to pay taxes on your savings

The retirement account you choose determines when you pay taxes on your savings. There are two main types: tax deferred and Roth. Tax-deferred contributions give you tax relief this year, but then you have to pay taxes on withdrawals from your retirement account. Roth contributions don’t lower your tax bill this year, but your retirement withdrawals are tax-free.

While both types can help you save money on taxes, one is usually better than the other. Tax-deferred accounts are usually the better choice for those who think they are in a higher tax bracket now than they will be after retirement. By deferring their tax bill until retirement, they will lose a smaller percentage of their income to the government. But those who believe they are in the same tax bracket or in a lower tax bracket than they will be when they retire are usually better off paying taxes up front with a Roth account.

Choosing the right type of retirement account can help you avoid paying more of your savings to the government than you need. But if you think you’ve chosen the wrong type of account, that doesn’t mean you’re stuck with the way things are.

You can always open a new retirement account that is taxed the other way around and start putting some of your savings into it. You may also be able to do a Roth IRA conversion to turn some of your tax-deferred savings into Roth savings. However, if you do so, you will have to pay tax on the amount you convert this year.

Avoiding the three mistakes above will go a long way in helping you stay financially secure in retirement. If you are still making any of these mistakes, now is a great time to make a change. Try some of the tips above, then check back with yourself in a year or so to see how you are progressing towards your goal.

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