Planning for retirement can seem overwhelming without a streamlined plan set in place ahead of time. It is a multi-step process that is constantly evolving. In order to make sure that you are financially well-equipped later in life, you should start as early as possible. Essentially, the longer period of time you spend investing, the bigger of a financial cushion you will produce.
To ensure that you are the most prepared, here are a few pitfalls we recommend to avoid when planning for retirement:
1. Spending Instead of Rolling Over Retirement Accounts
A decision that people endure when changing jobs is what to do with the balances in their workplace retirement accounts. Generally, the options are to take the money in one single lump sum, leave the money in the plan, or have the money rollover into an IRA or a new employer’s retirement plan.
Any financial advisor, from a retirement planning perspective, would not recommend taking the money in one lump sum and spending it. After penalties and taxes, you do not get the full amount that you are entitled to—typically, you receive about 70% of the amount if you are under the age of 59 and a half. Aside from this, merely spending the money now will obviously not help you in the future during your retirement.
Financial professionals believe the most responsible choice is to rollover the funds into an IRA or your new employer’s 401K. When conducting this IRA rollover, it is important make sure that your retirement plan assets are rolled directly into the IRA, instead of being sent to you to deposit it into the IRA. This will inevitably avoid an automatic 20% withholding for taxes.
2. Investing Unwisely Along the Way
Regardless of the specific avenue, ensuring that you are well-educated in what you are investing into is crucial, even in your early working years. Whether it be a retirement plan provided by your company, or a self-directed IRA, make sure you weigh out all your opportunities to find the most reliable options for you and your family.
It is common to choose a route that allows for more investment options, like a self-directed IRA. This is not considered to be a frowned upon choice, as long as you are picky over what options you actually end up choosing—do not always fall for whatever the current “trendy” investment is, as it could be detrimental for your savings. Self-directed investing usually involves a steep learning curve, so it is generally recommended to seek the advice of a trusted financial advisor. Paying fees for poorly performing, actively managed mutual funds is another unwise investing move in itself.
3. Not Planning for Health Care Costs
No matter how prepared you aim to be, you will likely still be in shock at how much money actually goes towards health related costs during your retirement age. Each year, the average total price increases, leaving people in need of extra help to cover it all. According to Investopedia, a 65-year-old couple who retired in 2020 can expect to spend almost $300,000 in health care and medical expenses throughout retirement, not including long-term care at another $100,000 annually.
A financially responsible option is to purchase supplemental insurance, like a long-term care rider. A long-term care rider is a living benefit on a life insurance policy that lets you access a portion of the policy’s death benefit every month to pay for long-term care expenses. This will aid the needed costs for daily living later in life, freeing up your life savings so you can enjoy your golden years the way you intended.
It is never too late to start saving for your retirement. If you haven’t already, start today. You’ll appreciate the efforts you made during your working years when you are enjoying all that your retirement has to offer.