5 Retirement Mistakes You Absolutely Need to Avoid
The amount of money needed for retirement depends on factors including lifestyle, age, and health. Generally, experts suggest that individuals should aim to live off of 80 percent of their final pre-retirement salary. Someone who made $100,000 per year at retirement, then, should have enough saved that they can comfortably spend $80,000 per year when they leave the workforce.
To achieve this figure, it is critical to start saving money as early as possible. Fidelity, for instance, suggests workers should have an amount equal to their annual salary set aside by age 30.
But despite the wealth of retirement planning resources and support available to workers, a 2019 survey conducted by GOBankingRates found that 64 percent of the 2,000 respondents were unprepared for retirement and had less than $10,000 in designated savings accounts. The COVID-19 pandemic and its economic implications, meanwhile, has made retirement planning and saving even more difficult for many Americans. Here are five mistakes to avoid to stay on track for a secure and enjoyable retirement.
1. Not Having a Retirement Plan
Setting aside money without any consideration for how or when you want to retire is far from an effective retirement strategy. Any approach to saving should take into account such things as long-term health care costs, future travel plans, and insurance.
Meeting with a Certified Financial Planner (CFP) or registered representative specializing in retirement planning should be one of the first steps to crafting an effective savings strategy. These professionals can not only advise you on retirement-related topics, but also provide assistance in how to more effectively save money and update your plan as necessary.
2. Waiting Too Long to Start Saving
One of the best pieces of retirement advice is to start saving as soon as possible. In a November 2019 financial security poll conducted by Bankrate, respondents 50 and older said their biggest financial regret was that they waited too long to begin saving for retirement.
Setting aside at least 10 percent of your income is a good starting point, and will likely be easier for younger people with fewer expenses and bills. According to Morningstar calculations, with the assumption of a 7 percent annual rate of return, someone who started saving $381 per month at age 25 could have $1 million in retirement savings by age 65. Unfortunately, not enough people are willing or have the means to do this.
"Many people do not start to aggressively save for retirement until they reach their 40s or 50s," notes KAI Advisors CFP Ajay Kaisth. "The good news for these investors is that they may still have enough time to change their savings behavior and achieve their goals, but they will need to take action quickly and be extremely disciplined about their savings."
At 50, workers can start making larger contributions to retirement accounts. As of 2020, the catch-up amount was an additional $6,500 and $1,000 for 401(k) plans and IRAs, respectively.
3. Ignoring Employer 401(k) Matching Incentives
If available, you should not only contribute to an employer-sponsored 401(k) plan but also maximize your returns by setting aside as much as your employer will match. The contribution limit for 2021 is $58,000, or $64,500 for those age 50 and older. Employers will often match a percentage of your salary; this, in essence, is free money. The majority of companies that offer matching contributions set aside 50 cents for every dollar the employee contributes, up to 6 percent of their annual salary.
You can borrow from your 401(k) account, but this should be avoided except in the event of an emergency. Loans from these retirement savings accounts typically have to be repaid with interest within five years. Making these repayments will also likely reduce the amount you can afford to contribute--and how much your employer matches--during the five-year window.
4. Not Considering Long-Term Care Costs
It is highly probable that your health care costs will increase as you get further into retirement. The average health care cost per year for a 65-year-old in the United States is more than $11,000, and many Americans are unable to afford these costs as they age. Fidelity estimates that the average American couple spends $285,000 on health care in their retirement years, and this does not even include long-term care costs.
Since 1999, the bankruptcy rate of Americans age 65 and older has doubled as a result of high health care costs. It's important to consider this when determining how much you need to save for retirement.
5. Claiming Social Security Too Early
Retirement accounts are not the only source of income for those who can wait until they are age 62 or older to stop working. The US government provides Social Security benefits to workers at this age, but deferring these payments, if possible, can provide long-term benefits.
The monthly payment for those who claim Social Security at age 62 is reduced by 30 percent. However, those who wait until they are age 67 to claim Social Security receive 100 percent of their benefit amount.