How To Avoid Retirement Planning Mistakes

Have you started preparing for your retirement? Here is a list of retirement planning mistakes that you must avoid if you want to make most of your retirement planning:

1. Not having an investment plan

The biggest retirement planning mistake one would make is not having a road map to retirement. Your plan should spell out when you want to retire, how much annual income you may expect to have, how large of a nest egg you will need to generate that much income and which investments you are choosing to get the job done. In order to choose your investments, your plan should specify the risk tolerance and how much ups and downs you are ready to bear without taking stress. When you calculate how large your nest egg will be by retirement, include the amount of money you have already got toward that goal.

2. Quitting your job

It is likely possible that a person may change jobs dozen times during their career and many do that without even realizing that they are leaving the money on the employer’s table in the form of employer’s contribution to 401(k) match. This means that you don’t have complete ownership of the funds that your employer matches until you have employed for a set period of time (often five years). So, don’t decide to leave the job before considering this situation especially if you are close to the deadline of five years.

3. Not saving now

It is important for you to understand that every dollar you save now will continue growing until you retire. There is no other alternative to compounding interest than time. The time once gone will never come back. Thus, the longer your money accumulates, the better your future retirement savings will be. So, you must start saving right away.

4. Not having a financial plan

If you don’t want to run out of money and want your retirement to be stress-free and financially secured, create a financial plan that considers your expected lifespan, your planned retirement age, retirement location, general health and the lifestyle you are expecting to lead before you decide on how much to set aside. Update your financial plan on regular basis and with changing lifestyle. You can also seek the advice for a professional financial advisor to ensure your plan makes the most for you.

5. Not contributing enough to your company match

Check if your company is offering 401(k) match. If yes, then you make most of it by contributing the maximum amount to take advantage of the entire employer match if available. If there is no 401(k) match, take out a traditional or Roth IRA.

6. Using the funds before your retirement

It is always important to remember that the more you have saved, the better it is for you. This is why you should always avoid dipping into these savings before you actually retire. It may not be a wise move to take out money from your retirement savings to pay off your debt or for child’s education. Instead, you should make a goal for your child’s education separately and save money to accomplish your goal.

7. Avoiding medical expenses

There is going to be several health issues as we grow older. While you are saving for retirement, it is not right to forget about your health and ignoring medical expenses attached with it. Therefore, when you create a budget you should give much importance to having a good health insurance cover. With your health insurance in place, you can get the treatment you need without having to worry about your growing medical bills.

8. Not rebalancing your portfolio

It is highly important to rebalance your portfolio quarterly or annually to maintain the asset mix you want as market conditions change or as you approach retirement. You would like to scale back your exposure to equities while increasing the percentage of bonds in your portfolio as you inch closer to last days of work.

9. Improper tax planning

If you think the tax bracket will be higher in retirement than during your working years, then it may make sense to invest in a Roth 401(k) or Roth IRA. By doing that you will pay taxes on the front end and all withdrawals will be tax-free. Also, if you think your taxes will be lower in retirement, a traditional IRA or 401(k) is better since you avoid high taxes on the front end and pay them when you withdraw. Borrowing money from your regular 401(k) could result in double taxation on the amount you owe since you must pay off the loan with after-tax dollars and your withdrawals in retirement will also be taxed.

10. Falling into debt

Taking out too much debt before your retirement could have a negative effect on your savings. Drawing down your retirement savings to pay for debts and using for emergency funds to pay last-minute debt can stop you from saving for retirement. So, you must pay off your entire debts before you start saving for retirement. Just make sure to manage your finances properly while saving for retirement and stay away from debts.

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