Planning for retirement is one of the things that most young individuals are aware of, yet very few do properly. Fortunately, the resources for people who want to learn about this topic are so sophisticated that the process is as painless as ever. Just consider the fact that almost every employer is going to help with retirement planning. Not to mention the abundance of online tools that people can use to self-educate and learn about ideal strategies.
Nevertheless, given how complex this topic is, the margin of error runs quite high. In translation, almost every person trying to plan their retirement is at high risk of making at least one mistake that will impact their savings. So, what are some of the most common examples of errors that should be avoided?
Taking Your Money Out
Unlike restricted saving accounts, which are not that common anyway, individual retirement accounts (IRAs) do not forbid one from accessing the money. So, people who want to withdraw a portion or all their funds will be at liberty to do that. The problem, however, is that every withdrawal from a retirement account is going to cost much more than the amount taken. Why? Because that money was invested to earn a rate of return. Thus, if it was left in the account, it would have yielded in revenue from earnings after years went by. So, someone who had $10,000 invested at 5 percent compounded annually for ten years was going to have over $16,000 in a decade. If, however, they take out the money right now, that passive profit of approximately $6,000 would be erased.
Not Understanding the Tax Implications
Choosing between a traditional and a Roth individual retirement account (IRA) is something that many people fail to properly research. According to the founder of Financial Fiduciaries, LLC, Thomas Batterman, understanding the differences between these two types of IRAs are crucial to one’s cash flow. With the traditional accounts, one is investing money pre-tax and their yearly taxable income drops. So, they end up paying less tax right now. With Roth accounts, people invest their out-of-pocket, post-tax money which means that their annual taxable income will not be reduced. So, their tax liability for the year will be greater.
Given this information, most individuals would choose to use traditional accounts to save on taxes now. Unfortunately, there are other factors that must be considered as well. With Roth accounts, any retirement withdrawals made later will be completely tax-free. That is not the case with traditional accounts, however, as people will have to include their withdrawals into taxable income. Depending upon your tax bracket now and later when it comes time to withdraw these balances to fund your retirement, whether you deducted before you deposited may have a big impact on what is available to you after tax when you retire. And this calculus is further complicated by the fact that sometimes, depending upon the nature of any other retirement income you might have, the taxes on distributions from regular IRAs (where you deducted the original deposits) may be subject to little if any tax. So, seek help to sort through these options.
Once a person retires, they are generally out of their employer’s protection. That means that they will no longer have benefits, such as; healthcare coverage. Well, it is no secret that the older one gets, the more likely they are to succumb to various diseases. Thus, it is crucial to think about the costs of healthcare that will come into play now that the person must start paying out-of-pocket. According to some estimates, these costs can go up to $275,000 for those retiring at the age of 65. Fortunately, Medicare provides pretty good coverage after 65 with the purchase of a relatively inexpensive supplement. Costs can be exorbitant if you quit work before you can be covered by Medicare.
Putting Others Ahead of Yourself
Helping one’s family and friends is one of the most basic human instincts, as almost everyone has the initial urge to provide aid to their loved ones. However, by doing so, it can prove to be a poor decision at times. According to Thomas Batterman, when a person decides to take some money out of their retirement account to pay for their children’s education, per se, they are making the mistake of sacrificing their interest. Sometimes, realizing that there are other alternatives before resorting to retirement accounts is the much smarter choice. For instance, the number of government-sponsored college aid programs is so high that there should be no need to use someone’s retirement account. I’m fond of saying that the best thing that you can do for your loved ones is to make sure your financial footing is sound enough that you won’t need to put a financial burden on them to care for you later in life.
Underestimating the Length of Retirement
Ultimately, planning for how long retirement life will last can be the toughest question that needs to be addressed. This is because people normally do not make plans about their date of death. Nevertheless, understanding that retirement at an early age will require much more capital is a great start. Then, by learning how to adapt and overcome scenarios in which one lives much longer than they expected is the easiest way to overcome potential struggles. If you can, try to plan to live comfortably in retirement on a level of cash flow from your investments, that will cause the principle value to remain intact over time. For those that don’t want to leave anything to their family after their death, this has the disadvantage of leaving money for your heirs. It also provides an advantage of ensuring that you can live to any age and always be comfortable with your level of income.