4 Common Money Mistakes for Pre-Retirees
Nearing retirement, your thoughts start to drift farther and farther away from the job at hand and closer to what you’ll be able to do in all that free time - catch up on some reading, enjoy an afternoon on the back nine or travel the world with your spouse. But as you get closer and closer to your retirement party, it’s important to stop and assess you and your spouses’ readiness for retirement. We’ve rounded up the four common mistakes soon-to-be retirees make regarding their money, so you can prepare now to make your transition into retirement a bit smoother.
Mistake #1: Neglecting To Create a Retirement Plan
Interestingly enough, in a 2019 Retirement Confidence Survey, 8 in 10 retirees said they were feeling confident that they’ll have enough to live a comfortable retirement, yet only 42% (or 4 in 10) have actually attempted to calculate how much money they’ll need in retirement.1
The first, perhaps the biggest, money mistake any pre-retiree can make is not heading into retirement with a plan. A plan to understand how much you really need to retire before you reach retirement can give you time to adjust your savings strategies, anticipated withdrawal strategy, and portfolio allocations. Additionally, it can help you and your spouse understand if your retirement expectations are going to be realistic or not.
Simply put, if you don’t understand how much you should have to retire comfortably, you won’t know if you’re on track.
Mistake #2: Waiting To Start Saving
Once you’ve created your retirement plan and discovered how much you and your spouse need for retirement, it may become clear as to why you shouldn’t delay the savings process any longer. And while putting more away now might feel hard to do, it’s important to remember that due to the principal of compound interest, the more you are able to put away now, the more time those additional dollars have to compound and grow into retirement. The best way to allow compound interest to take effect? Time. Give your money the years (or decades) it needs to collect interest and grow into what you’ll need in retirement.
Mistake #3: Underestimating Healthcare Long-Term Care Costs
Those between the ages of 65 and 74 spend an average of $5,956 in healthcare costs annually, not including any type of long-term care.2 Whether that sounds like a lot to you or not, the number can certainly add up over time and eat into your retirement savings, especially if an unexpected injury or illness occurs.
One way to help with the costs of healthcare is to understand your Medicare coverage and supplemental plan options. Even a well-funded retirement plan can become derailed if long-term care costs for assisted living, or nursing care are added to the plan. Best to address these risks early on before your retire.
Last, if you fail to sign up for Medicare upon becoming eligible at age 65, you face a penalty that gets added on to the standard premium. This penalty isn't a one time occurrence either. It gets added to the premium and will have to be paid every year that you choose to use Medicare.3
Mistake #4: Underutilizing Tax-Advantaged Accounts
Never underestimate the impact taxes can have on your income now and through retirement. Both Traditional and Roth IRA, as well as employer-sponsored 401(k), 403(b), and 457(b) plans can provide tax-advantaged opportunities that can make a difference in your retirement savings. Traditional retirement accounts reduce the amount of taxable income for the year they are created. For example, if you're in the 24% Federal tax bracket, you're more than likely paying 5-10% in state income taxes as well. For every dollar you contribute today to a Traditional or pre-tax retirement plan, you reduce taxes by 30%-35% when combining Federal & State tax savings! Note that you'll need to pay taxes upon distributions in retirement, but at hopefully lower tax rates. Roth IRA contributions are still taxed as part of your income for the year they’re added into the account, but then they are withdrawn from the account tax-free during retirement.
As a reminder, the IRS has carried forward the 2020 contribution maximum for employer-sponsored retirement accounts in 2021 to $19,500 a year and IRA & Roth IRA contributions to $6,000 a year for individuals under 50.4 That makes now an opportune time to begin catching up on your retirement plan contributions if you’ve found yourself falling behind in recent years.
Preparing for retirement can bring about a mix of emotions - excitement to leave the workforce and anxiety about affording your ideal standard of living. Putting in the work now to help avoid common retirement pitfalls could create more peace of mind as you and your spouse look forward to enjoying your years of freedom ahead.
- https://www.ebri.org/docs/default-source/rcs/2019-rcs/2019-rcs-short-report.pdf
- https://www.bls.gov/opub/btn/volume-5/spending-patterns-of-older-americans.htm
- https://www.medicare.gov/your-medicare-costs/part-b-costs/part-b-late-enrollment-penalty
- https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits#:~:text=Deferral%20limits%20for%20401(k,to%20cost%2Dof%2Dliving%20adjustments
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