It is not always a lack of savings that keeps people from enjoying a great retirement. Despite having a nice nest egg, people can make some common mistakes that hinder their retirement plans.
Kiplinger’s recent article entitled “Avoid These 4 Mistakes That Often Derail Retirement Plans” highlights commons mistakes people make that can wreak havoc on their golden years:
Early Withdrawal Penalties. It is critical that you know and understand the rules of your retirement plan if you want to keep the plan on track. If you want to tap into your IRA or 401(k) before age 59½, you’ll have an early withdrawal penalty. You’ll also have to add that money in your gross income for the year and pay an additional 10% tax penalty. There are a few exceptions to early withdrawal penalties but it is best to avoid early withdrawal if at all possible.
Forgetting about your Employer Match. A recent survey found that roughly one-third of workers don’t contribute enough to their 401(k) or employer-sponsored retirement plan to get the full match from their employer. The value of this oversight is about $750 each year. That itself can add up to almost $100,000 in missed retirement savings over the course of your career. Retirement savers need to leverage this “free” money at work.
Paying High Investment Fees. Figure out how much you are paying for your investments. Investment costs may seem minimal —perhaps 2%—but can chip away at your savings over time. These fees compound along with your returns so you are losing the growth that money could have had.
Missing Out on Compound Interest. Compounding is one of the best rationales for saving early. On a very basic level, compound interest is earning or charging interest on top of interest. When retirement savers aren’t aware of the value of compound interest, they are missing out on growing their money more quickly. Time is critical when allowing compound interest to work for you and that’s why you should think of the long-term when saving for retirement.
Many people delay planning for retirement. The closer you get to retirement, the more crucial it is that you have a sound plan that will keep you on track. However, only one in five people has a written plan for retirement.
A comprehensive plan will help get you to and through your later years. Your comprehensive plan should include strategies to pay for health care and long-term care as well as a plan for claiming Social Security. Finally, don’t forget to visit with your advisors about tax-efficient strategies in retirement and how best to leave a legacy for your family.
Reference: Kiplinger (Jan. 29, 2020) “Avoid These 4 Mistakes That Often Derail Retirement Plans”