Avoid These Common Retirement Planning Mistakes
The first thing that we ask our clients when they start talking about retiring is, “what are you retiring from and what are you retiring to?” So when is the right time to start saving for retirement? Today! It will always be easier to adjust your plan with all the turns life throws at you, than it is to start from scratch when you are ready to retire. Many of our clients don’t really have an idea of what they want their plan to look like, but once they get talking about their goals and dreams, the picture becomes clear. It is important to start planning sooner than later and meeting with a financial advisor is a good way to get the ball rolling. In this blog we will discuss a few common mistakes to avoid when planning for your retirement.
Rate of Return
One mistake is that too often, clients are only focusing on the rate of return. This can lead to them not being aggressive enough or being too aggressive for their needs. Every person has different needs so they need to be focused on only their portfolio and how it can help them reach their retirement goals. Many people think that planning ends once they have already made the decision to begin their retirement journey, when they really need to continue their planning. The best way to solve this is to meet with a financial advisor at least annually and review their allocations.
IRA Time Bomb
Another mistake that pops up is when clients have a large Traditional IRA and no other forms of investment accounts. In this instance, every time they need to take out money it will be taxed. We call this the IRA time bomb and this can have an impact on their Social Security. To combat this mistake it is crucial that clients not just have a diversified portfolio, but also have diversified funds, meaning that they have Traditional IRA’s, Roth IRA’s, and also taxable accounts. It is important that clients are able to maximize their entire tax bracket and not be forced into the next bracket. For example if a client is pushed from the 15% bracket up to the 25% bracket they could be paying 66% more in taxes, which makes the 10% jump look a lot bigger.
Social Security or Pension
Clients also put too much weight on how much their pension or Social Security will get them through retirement. These are great sources of income, but they are usually not enough to get you through retirement on their values alone. One good way to battle this is by simply taking advantage of employer retirement plans, and employer matching. By not taking advantage of employer matching, you are essentially leaving money on the table that your employer is offering you. With that being said it is important to combine all your retirement plans at retirement so that you don’t miss a required minimum distribution. The penalty the government throws at you for missing a required minimum distribution is that they take 50% of the missed distribution as well as still taxing you on the whole amount.
Establish an Emergency Fund.
It is important to establish an emergency fund, but many times we see that clients have too large of an emergency fund that is just sitting in the bank collecting next to nothing in interest and on the other hand we see those who have no emergency fund. We recommend having between three and six months’ worth of expenses saved. When the unexpected happens and you don’t have enough in your emergency fund, you may have to pull money out of your retirement fund. This can lead to steep penalties.
Confider Inflation
Inflation is also important to consider because what you could buy with a dollar 20 years ago no longer costs a dollar and what you can buy today will not be the same in another 20 years. It is important to work with a professional who has the appropriate tools to create a retirement road map to help you anticipate the unexpected.
Lastly it is important to enjoy your retirement once that time finally comes! You’ve worked hard to be able to afford your dream retirement for so many years and we want you to enjoy every minute of it! Too often we see clients that are too afraid to spend their money they have worked so hard accumulating. Our passionate staff and financial tools will help make sure your financial goals align with your lifelong dreams!
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of [FA NAME] and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. RMD’s are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation. Hypothetical examples are for illustration purposes only. Diversification and asset allocation do not ensure a profit or protect against a loss.