Like the New Year which we just ushered in, gone are the old methods or strategies that retirees once relied on such as interest rates from long term CDs or bonds, and home equity or reverse mortgages. But with low interest rates and the current housing market, retirees may have to adjust to an entirely new normal.
Retirees can eliminate much of their stresses when it comes to retirement planning by avoiding six mistakes that many have made or will make.
Mistake no. 1: Not taking advantage of the retirement-planning tools available
Retirement accounts like IRAs or 401(k)s are vital and important sources of income for retirees, and many employers provide accounts for their employees to invest in. Working individuals of all ages should establish these accounts and regularly contribute to them. Most employers will even match the funds in your 401(k), which is free money that can go to your retirement so it's wise to contribute the fullest amount possible to achieve the fullest match possible.
The best part about 401(k) contributions is that they are deducted from your paycheck before taxes, therefore they're a piece of untouched income that won't require taxes paid on them upon receipt and can grow until they are needed or have to take mandatory distributions (by age 70 ½).
Mistake no. 2: Misunderstanding all the opportunities for retirement saving available
Some retirees believe their portfolios are diversified because they own investments through different money managers, when in reality they are limited to one portion of the financial market. These investments give an illusion of diversification but may just be repeats of the same type of stocks or invested in the same sector of the industry without including global holdings or varied types of stocks.
In fact, with the rapid globalization occurring, investors would be wise to put their earnings in countries who have experienced or are predicted to experience significant growth. Investors consume products from all over the world and why not take advantage of the retirement income they can receive from investments in the same places?
Another mistake is putting money in the most talked about investments at the present moment. By the time word gets around about an investment, it's probably already too late to make significant money on it. Retirees should educate themselves on the available investments with predicted growth and that have potential to gain recognition in time. However, be aware of fees (see Mistake no. 4) that accompany investments with significant monetary consequences.
Mistake no. 3: Borrowing or cashing out your 401(k)
While you can borrow from your 401(k) early, it doesn't mean that you should. These funds will either have to be paid back and will lose out on long periods of growth they could have had, limiting your retirement income or taxed if it's not paid back and you change jobs.
Another example is that many people make the mistake of cashing out their 401(k) accounts when they switch career positions. While it can provide a sum of money in the interim, that can be quickly diminished by taxes owed on the amount, as well as additional penalties imposed.
Mistake no. 4: 12b-1 mutual fund, hidden 401(k) and investment fees
The reality is that while returns aren't guaranteed, fees sure are. Humans are return driven and it's only natural for funds to be picked for their potential offerings. However, the potential growth or returns on an investment can be offset by thousands of dollars in fees.
While at first the fees owed don't seem like much, this amount compounded over time can put a hefty financial burden on your retirement income. In fact, it may even add up to a six-figure difference in the long run because you don't just lose the money paid in fees but also the growth that money could have achieved.
Also, make sure that your investments are under supervision of a tax professional to ensure that minimal is lost in taxes. Many accountants do not specialize in tax planning, so make sure to work with a professional that can help lower your taxes by employing different strategies that many have not have thought of.
Mistake no. 5: Failing to plan
A plan is crucial to ensuring retirement success. Go through a list of important life questions with a financial professional who can help you from the start.
Just like a road trip, having a general idea of the path will only require course adjustments along the way, but without a destination or road in mind, the trip can't even begin. Retirement income is not something that can be summoned immediately, and the smallest amounts of savings right now over time can provide a big, positive impact.
And if you do have a plan, make sure you are actively engaging in it, assessing investment performance or making adjustments after big life changes.
Mistake no. 6: Starting too late
Retirees can no longer rely on Social Security or the "three-legged stool" to keep them afloat in retirement years. Health-care-cost coverage is no longer guaranteed, and retired couples may need quite a few hundred thousand dollars in their hands to ensure quality health care in their retirement years.
The longer you wait, the more years compounded, the more growth you may be missing out. The bottom line is to start saving now, and you will see some significant accumulation when you'll need it the most.
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