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March 21, 2022
Unfortunately, retirement is not as simple as many would like to believe.
Despite the numerous articles on retirement options available on the web, retirement remains a mirage for most people. There are 7 common mistakes that prevent people from getting the retirement of their dreams. These mistakes make it more difficult to retire early or even at all. Fortunately, some of these can be easily avoided if you know what they are in advance. Here are the top seven retirement mistakes that will prevent you from retiring early (or ever). Hint: the one we can help you with the most is #14…
Having an emergency fund is one of the best ways to keep your retirement hopes alive. It’s important to have access to at least 6 months’ of expenses saved up so that the retirement journey doesn’t get interrupted by an unforeseen event.
An emergency fund is a savings that you should keep at all times just in case something happens. The Fund isn’t meant to be used for retirement, but it should help you sleep better at night if an unexpected expense pops up.
An emergency fund is a reserve that is created to help you survive a sudden, large expense. It’s important because it ensures that an unexpected event doesn’t wipe out your retirement savings account.
For example, what would have happened if your car suddenly stopped working and needed $5,000 in repairs? Without the emergency fund, you’d have to withdraw from retirement savings or get a loan. In both cases, this will greatly affect your retirement goal.
It is very easy to make assumptions when trying to plan for retirement (e.g., rate of return on investment). Unfortunately, retirement doesn’t always work according to plan; there are many unknowns in retirement planning such as how long retirement will last, health care costs, and future expenses.
If you don’t have a retirement plan that accounts for unknowns (e.g., inflation), then it’s very likely that retirement plans will fail because they didn’t account for your retirement reality. It is advisable to make retirement plans flexible enough so they can be adjusted easily when the unknown comes up.
A retirement back up plan is a retirement strategy that ensures your retirement dreams will be achieved in case the original retirement plan fails. The best retirement back up plans are easy to understand and implement so they help you act quickly when unexpected events happen.
Let’s say you’re planning for retirement, but don’t have a back up plan for retirement just in case something goes wrong (e.g., stock market crash). You’ll probably end up with no money saved or very little money saved by retirement age because you didn’t account for things like inflation.
If you have a retirement back up plan, then it’s likely that retirement savings will still be intact if your retirement plans fail for some reason. In the previous example, the retirement back up plan would protect retirement savings from inflation.
Many people realize there is not enough money in retirement; however, they never take steps to fix the problem (i.e., create an actionable plan). This lack of action usually results in poor retirement savings habits such as disrupting retirement investments in favor of capitalizing on market dips in hopes of making fast money or withdrawing early from existing retirement accounts.
These retirement mistakes can be easily avoided by creating a retirement plan and sticking to it. It’s also advisable to automate retirement savings so that you put money away automatically each month. This way, it won’t be easy for you to touch your retirement savings account because the money will already be taken out of your account before you have a chance to do something about it.
In order to fix poor retirement savings habits, it’s important to create a retirement plan and stick to it. The retirement plan could be as simple as creating a retirement account and depositing money into it every month. Once you have the retirement account, then it becomes easy to automate the process so that retirement savings is done automatically for you without much effort on your part.
It’s not just enough to have a retirement fund, but it’s important to have specific retirement plans so that you can see if your retirement dreams are achievable or not. It’s best to create a financial plan detailing how much retirement income will be required and what type of retirement lifestyle is possible based on available resources. If the numbers look tight, then making changes in retirement savings, lifestyle choices or finding additional retirement funds could be necessary for achieving the desired goal.
A retirement plan is a set of retirement goals and the corresponding retirement income required to meet those goals.
how much retirement income will be required and what type of retirement lifestyle is possible based on available resources.
This retirement plan should also take inflation into account. If you’ve already retired, then it’s very important to do a retirement review every year. This way, if anything has changed (e.g., living expenses), then your retirement plans can be adjusted as necessary to ensure that retirement dreams are still achievable.
It’s important to have a back up plan in place in case your retirement plans don’t work out as planned. Many people use their home equity to fund retirement, but after retirement they can’t sell their homes due to market conditions or health issues preventing them from transitioning into another form of retirement. This is why it’s important to have a retirement backup plan in place so you can continue living a retirement lifestyle even if your retirement funds aren’t sufficient enough to fund retirement.
For example, you could buy a reverse mortgage in retirement that makes part of your house equity available as cash for retirement. In addition, some retirees use annuities as another form of retirement income with the benefit being that they don’t have to sell their homes or give up control of their assets because annuity income continues for life without regular payments becoming due later on. As long as you have an idea about how much money you need and what kind of backup resources are available in retirement, you can plan a retirement that pays off.
Retirement accounts provide different retirement options for accumulating funds and deferring taxes until withdrawals are made. Unfortunately, there are many people who don’t know how retirement accounts work, which results in them losing out on various tax breaks they can claim upon retirement. For example, some contributions to certain types of retirement accounts are only eligible if your income falls within specific limits.
Many people realize they don’t have enough money saved up for retirement; however, they don’t take advantage of strategies that can help them save more money (e.g., retirement plans). One of the most common retirement mistakes is not taking advantage of all the available tax benefits offered through different retirement accounts such as 401(k) retirement plans.
The retirement tax is the retirement income taxes you pay when withdrawing retirement funds.
Traditional IRA & Traditional 401(k) withdrawals are taxed at ordinary income rates upon distribution. Some people choose to claim these distributions as non-taxable income based on annual contributions made and life expectancy factors of each individual’s situation. Roth IRA & Roth 401(k) withdrawals do not normally incur any withdrawal taxes
Although some retirement accounts provide beneficial tax treatment such as no taxation of retirement benefits or reduced taxation, there are still retirement plans with unfavorable tax treatment such as the following:
Withdrawal taxes for early distribution from a 403(b) plan – 10% penalty tax is applied to retirement account withdrawals taken before age 591/ 2
Withdrawal taxes for early retirement from a 457 plan – 10% penalty tax is applied to retirement account withdrawals taken before age 715/ 1
It’s a retirement mistake not taking full advantage of retirement plans that have favorable tax treatments.
Retirement accounts offer tax benefits to those who can take advantage of them including retirement savings contributions getting tax deductions, retirement funds never being taxed again, and even education credits for putting your kids through college. You should avoid retirement plan mistakes by taking full benefit of retirement accounts because they are one of the best retirement planning tools available.
Many people assume that retirement expenses will remain the same in retirement as they were when they were working. However, retirement costs are likely to increase with inflation leaving retirees worse off than they previously thought. This is why it’s important to factor inflation into retirement planning calculations so that the retirement numbers don’t get affected by unexpected changes in cost of living.
Inflation is the rate at which prices of goods and services change over time. This means that retirement expenses are likely to increase every year, leaving retirees with less money in their retirement savings account. For example, if your retirement cost calculations show you need $50,000 per year in retirement income, then inflation will make this amount less by the time retirement starts because expenses are expected to increase with inflation.
The importance of inflation adjusted growth projections means knowing how much money will be needed to ‘maintain’ your current lifestyle so this is where retirement projections will come in to help determine retirement expenses.
For example, let’s say retirement calculations show that retirement savings need to be worth $5 million dollars so you can retire at age 65 and live comfortably until age 85 because retirement expense estimates are $100,000 per year (inflation adjusted). If retirement projections show this nest egg needs to grow by 6% every year to get the required growth rate for retirement planning purposes; then that means that retirement savings would need to be worth $6 million at retirement which include income growth expectations of $50,000.
The biggest retirement mistake is not having enough money saved up for retirement. This is because it doesn’t matter how much money you save if there isn’t enough to get started with. For example, the average retirement fund according to Fidelity is $57,000 and this isn’t going to help individuals who need an additional 3 million dollars upon retirement; thus making it extremely important to make retirement savings a priority even when life throws curveballs at you and your needs become more immediate than retirement benefits (e.g., children’s college funds).
There are multiple causes of low retirement savings such as credit card debt and student loans, eating out more than eating in (increasing food costs reduces retirement savings), and not promoting retirement savings in the workplace. There is also a lack of retirement plan knowledge that prevents people from understanding how retirement plans work; thus leading them to make retirement plan mistakes such as under-saving for retirement because they don’t know better.
If you’re asking yourself ‘how do I save for retirement?’ then chances are retirement saving isn’t where it should be in your life even though you have many other priorities right now. Don’t wait until it’s too late to start saving for retirement and believe in yourself so much so that even when life throws curveballs at you, you can reach financial stability so retirement dreams are realized.
Financial Planners help people understand how much money to save for retirement so this means that not having access to these tools should not prevent anyone from saving for retirement because you don’t need investment knowledge to save money, but you do need an action plan to show retirement saving is a priority.
It’s never too late to start retirement planning, it’s just harder the later you start retirement saving. Why? Because if retirement funds aren’t started soon after entering the workforce, retirement will be more expensive because there won’t be as much time for retirement-saving investments to grow into a sizable nest egg that can fund retirement expenses. For example, let’s say that your retirement cost calculations show you need 5 million dollars in retirement savings to retire at 65 years old and live comfortably until age 85; well if you don’t have any retirement savings by this time, then it means investing 1 million dollars per year (inflation adjusted) every year until age 65 which would result in retirement savings of 4 million dollars because the first 1 million dollars would be retirement-saving investments that are now worth 3 million.
This is why it’s important to start retirement saving as soon as you enter the workforce because if you wait 10 years, then retirement saving becomes 5 times more expensive than if retirement funds were started at 25 years old. If retirement security is a priority, then it’s never too late to start retirement planning by preparing an action plan incorporating retirement savings into your financial life.
Starting retirement savings early is better simply because retirement-saving investments have time to grow into a sizable retirement nest egg that can fund retirement expenses. For example, if you invest 1 million dollars per year (inflation adjusted) for 10 years with an average 8% return on investment, retirement savings will be more than 4 million dollars because the first 1 million dollars would be retirement-saving investments that are now worth 3 million. This is why it’s important to start retirement saving as soon as you enter the workforce because if you wait 10 years, then retirement saving becomes 5 times more expensive than if retirement funds were started at 25 years old.
Try using our retirement calculator to get an idea of where you stand.
It’s also not wise to wait until your 40’s or 50’s to start retirement saving. This is because retirement-saving investments need time to grow into retirement funds which will be depleted within the next 20 years for retirement expenses. If retirement funds aren’t started soon after entering the workforce, retirement will be more expensive because there won’t be as much time for retirement-saving investments to grow into a sizable nest egg that can fund retirement expenses. For example, let’s say that your retirement cost calculations show you need 5 million dollars in retirement savings to retire at 65 years old and live comfortably until age 85; well if you don’t have any retirement savings by this time, then it means investing 1 million dollars per year (inflation adjusted) every year until age 65 which would result in retirement savings of 4 million dollars because the first 1 million dollars would be retirement-saving investments that are now worth 3 million.
Many individuals wait until they reach retirement age to start retirement planning when they should have started 10, 20 or even 30 years earlier… This is a retirement mistake because when individuals enter their 60’s, their retirement savings often aren’t sufficient enough to retire and must work part-time jobs until death. To avoid this retirement mistake of not having a sufficient retirement nest egg, then start retirement planning soon after entering the workforce by preparing an action plan incorporating retirement savings into your financial life.
The longer retirement saving is postponed, the more retirement-saving investments must grow into a sizable retirement nest egg that can fund retirement expenses. This means waiting 10 years results in retirement-saving investments having to double (or triple) in value which requires much bigger retirement funds than if retirement funds were started at 25 years old. If you wait until you’re 40 years old to start retirement planning then it will be 5 times more expensive … stop procrastinating or not thinking retirement matters that retirement savings is the best retirement mistake you can make.
The earlier retirement savings starts, the better. If retirement saving does not start in your 20’s, then retirement-saving investments have to quadruple in value to fund retirement expenses. This means if retirement funds are started at 30 years old instead of 25 years old, retirement-saving investments will have to quadruple in value because five more years were added before starting retirement planning which means it would require 4 times more money at retirement age than if retirement-saving funds were started at 25 years old. Even worse, waiting until 40 years old results in retirement-saving investments having to quintuple in value because 10 more years were added before starting retirement which requires 9 times more money at retirement age for retirement expenses. retirement mistakes include not investing enough.
Retirement calculations should always be updated despite how simple or complex they may be because it takes into account changes in life circumstances such as retirement age (increasing or decreasing), retirement income (increasing or decreasing) and retirement savings (increasing or decreasing).
This is important because retirement calculations show retirement progress which can give retirement savers a feeling of financial security when retirement projections show their nest egg will be worth the required amount in retirement; plus, it helps keep retirement planners motivated knowing that they are making steady progress towards achieving retirement goals.
Financial planners help retirement savers stay on track by providing retirement calculations according to retirement needs being met so retirement planners are able to obtain retirement savings milestones that can lead them to retirement financial security.
Your retirement calculations should be updated at least annually because retirement needs and retirement savings can change at any time during retirement planning.
For example, a large medical bill or a home repair can affect retirement income while a pay raise or bonus could increase retirement income. A divorce could deprive retirement savings of future contributions while an inheritance may add to retirement funds.
The solution : Update your retirement calculations regularly using our financial planners. Update goals monthly with our retirement calculator
Many people make the mistake of not having retirement savings made on a regular basis or at all, which makes it difficult for them to build up retirement funds. The best way to overcome this retirement mistake is to have some form of automatic retirement savings where money gets moved from your checking account to your IRA on a monthly basis without any involvement from you whatsoever. Even having an automated transfer once a year is better than nothing.
The reason retirement planning experts recommend retirement savings should be made automatic is because it takes the thinking and worrying out of retirement saving by allowing retirement savers to forget about how much they’re putting away for retirement and just focus on other things that are more important such as family, business and pleasure.
This seems like an ironic mistake because retirement savers earn money by working so why spend it? Well, one big reason is that people can get carried away spending their salary (and other sources of income) which makes it easy for overspending to occur; plus, retirees tend not to feel as much pressure about retirement planning because retirement savings (pensions and retirement investments) may provide enough retirement income.
It is important to remember that retirement calculators show retirement figures which include the possibility of spending retirement savings so it’s easy for retirement savers to forget how quickly they can spend their nest eggs if retirement funds are not invested properly; plus, overspending has a bigger impact on retirement saving progress than most people think because there is no mandatory retirement age in Canada (and many other countries) where retirement fund withdrawals must be taken which means you can spend your retirement savings as soon as they’re available.
Paying off debt is important because retirement calculators show retirement figures which include the possibility of retirement savings growth; plus, retirement planning takes into account retirement withdrawals (which will be sourced from your retirement investments) so retirement savers need to know how much money they can safely withdraw each month. One big problem with not paying off debt is something called “retirement ruin” where someone who isn’t making retirement saving progress because it appears they don’t have enough income for retirement ends up having a lower standard-of-living in retirement than when working which means one day you may realize that early retirement didn’t work out as planned.
The short answer is, yes.
The longer answer is it depends on what you mean by debt because there are several types of debt which means not all debt has the same impact on retirement savings progress; for example, student loans don’t tend to get in the way of early retirement because they typically get interest relief while studying and many people pay off their student loan debts before trying to retire early.
However, other forms of debt such as credit card balances will significantly reduce retirement savings growth projections over the retirement saving years because interest charges accrue on a monthly basis which means retirement savers come up against retirement ruin when retirement funds don’t last as long as planned.
It’s important not to think of retirement savings and debt payments as two separate issues that happen at the same time because it makes retirement planning confusing especially if retirement calculators show retirement figures with different assumptions about what you’re doing with your money each month, year after year.
Retirement savers need to know that the retirement savings they’re putting away may not be enough for early retirement unless you take advantage of your employee retirement plan.
The reason why is because many employers will match some or all of your retirement savings contributions if they are made through payroll deductions which means each dollar contributed grows by 1.5% (or more) over time; plus, it’s often not necessary to contribute the maximum allowed because most employers limit matching contributions to an amount that can offset up to 3% of income on a pre-tax basis.
Therefore, it’s important to look at your total contribution rate (which includes any additional voluntary retirement savings contributions) when assessing retirement funding progress because retirement calculators show retirement funding progress based on retirement fund amounts minus total voluntary retirement savings contributions over the retirement saving years which means you don’t have to contribute 4% of income in order to achieve an 80% retirement funding success rate.
The retirement journey is not something many people are familiar with, which means you may need to seek expert retirement advice. Having a retirement plan created based on your unique retirement goals, needs and resources can significantly increase the likelihood of achieving your retirement dreams (or at least minimize the chances of early retirement failure). A financial planner can help you create retirement plans that maximize retirement savings and provide an optimal retirement lifestyle even before you reach retirement age.
– Retirement planning is complicated because it requires retirement savers to assess their retirement years, income sources and retirement spending needs.
– Retirement calculators are only as good as the assumptions used which means they may not take account of your individual retirement situation which can lead to uncertainties about retirement funding progress.
– Retirement planners will help you make sure your retirement plans are feasible by reviewing retirement financing options, savings contributions, minimizing taxes and other financial variables that can make an important difference between whether or not early retirement materializes.
Even if you are opposed to a financial advisor, it is always worth getting a second opinion. Especially, in something as important as your financial future.
Do these 14 mistakes sound familiar to you? If they do, then here’s some good news for you: The solution to each one of them is simple. For example, if saving enough for emergencies has been an issue in the past, open up a high yield online savings account so that cash is available when you need it. And if retirement funds are really tight, consider making additional retirement savings contributions that can either come out of your paycheck.
If you’re not sure where to start with retirement planning, connect with one of our financial planners.
Not everyone is lucky enough to have financial planners as parents, but that’s what Money Her Way is here for. We want to give every woman, no matter their age, the opportunity to take control of her finances.
