This article was originally published here
Pursuing your retirement goals is challenging without making specific, frequent, and easily preventable errors. Here are eight significant blunders to avoid, if at all possible.
1. Not taking taxes into account
In a letter addressing French scientist Jean-Baptiste Le Roy, Benjamin Franklin penned what may have been his final significant remark. It reads as follows:
“Our new constitution is now in place, and everything seems to indicate that it will be strong; yet, in this world, only death and taxes are certain.”
The taxes you will have to pay on withdrawals from your retirement accounts should be considered when you make retirement planning decisions. Retirement distributions from standard 401(k) and IRA accounts are taxed as ordinary income. The tax bracket in retirement will determine how much you’ll pay in taxes. It’s crucial to make plans for these tax payments so they don’t come as a surprise, even if you think your marginal tax rate would be lower in retirement than it is today.
2. Poor preparation (or no planning)
You are not immediately entitled to retirement when you reach a specific age. After you quit the job, you will need income because relying just on Social Security may not be sufficient.
The total reserves of the trust funds that pay out retirement and disability benefits will run out by 2035, according to the Social Security and Medicare Board of Trustees’ 2020 annual report.
Nevertheless, Social Security will still exist at that point since ongoing taxes will be sufficient to pay for 79% of the benefits provided to retired and disabled workers. But it implies that you might not want to rely on government services to ensure your retirement.
Poor planning can be expensive. Completely failing to plan for retirement can hurt your future. A recent survey from the US Federal Reserve found that almost 25% of Americans have no pension or retirement savings. Although saving for retirement is a lifelong effort, it is easy to lose sight of it when retirement is decades away.
3. Quitting a job before receiving 401(k) vested benefits
In a retirement plan like a 401(k), vesting refers to acquiring ownership of the account’s money. Employer payments are not always 100% owned by you, even though you always contribute your own money to the plan.
You acquire a larger percentage of your account each year (or own). You will own all the money in that account once you have reached 100% vesting.
Your employer won’t be able to forfeit or take the money back at that point for any reason. However, if you quit a job before you have fully vested, you will lose the employer contribution to your 401(k).
You can be forced to quit a job before earning all your benefits due to circumstances beyond your control. Maybe you’re just not the right fit for the job. However, leaving voluntarily means leaving money on the table because you don’t yet possess 100% of the money in your account.
To avoid losing out on those additional funds if you have to leave your work, think about how much you have invested.
4. Taking a payout too soon
Cashing out your retirement funds early could be unavoidable amid severe financial difficulties. The COVID-19 pandemic demonstrated this. Thank goodness the senate enacted the CARES Act, which exempts qualified individuals from paying the 10% early withdrawal penalty that would normally apply to payouts up to $100,000.
Cashing out your retirement savings is often a costly error unless there is an emergency. Your future retirement savings are lowered if you withdraw money from the market too soon. Mainly, this is because you lose out on compound growth, drastically reducing your earnings. Unfortunately, the compounding interest impact is lost if you miss it. Avoid withdrawing your retirement funds before retirement unless it is essential.
5. Put aside the bare minimum
You estimate the amount you’ll need for retirement and how much you’ll need to save to meet your financial objectives using online retirement calculators. You should consider various variables while making these projections, including your expected retirement age, potential additional income sources, the expected returns on your investments, and inflation, among others. With some preparation, you can calculate how much money you’ll need to attain your retirement objectives. However, life does happen.
The minimal required quantity of savings might not be sufficient in practice. You might not receive enough money from your investments, Social Security can stop paying benefits, or you might incur unanticipated medical expenses that cost more than you had saved. Even though you might be able to meet your retirement goals by saving only the bare minimum, it’s better to leave yourself some breathing room.
M. Dutton and Associates is a full-service financial firm. We have been in business for over 30 years serving our community. Through comprehensive objective driven planning, we provide you with the research, analysis, and available options needed to guide you in implementing a sound plan for your retirement. We are committed to helping you achieve your goals. Visit us at MarvinDutton.com . Tel. 212-951-7376: email: [email protected].