Top Retirement Mistakes

Originally posted on the Tree.com Money and Finance Channel

With the economic downturn of the last few years, traditional ideas on retirement have gone out the door. We no longer live in a world where we work for one company for 30 years and comfortably lapse into retirement. It’s just not that easy anymore. We’re living longer, medical costs are higher, and guaranteed retirement income has lowered. There’s too little money for the numbers of people that need it.

There is always time to recover. You can always get back on track, but let’s discuss some of the top retirement mistakes.

Retiring Too Early

In general, many people want to retire early, but few are prepared to do so. Our retirement system is set with an age of 65. You’re certainly allowed to retire early, but you need to keep in mind you may face reduced retirement income as well as significant tax penalties.

You’ll receive full Social Security benefits at the age of 65, but reduced benefits if you retire prior to the age of  65. If you do decide to pull your social security earlier, an option would be to leave your 401(k) investments to keep generating that tax-free income for a few more years. If you take from that 401(k) early, the IRS could take an additional 10% in early withdrawal penalties.

Also, keep your health care insurance costs in mind. If you retire prior to 65, there will be a gap between when your employer’s coverage ends, and Medicare begins. Private health insurance is of course available, but at a considerable fee.

Underestimating Needs

The general rule of thumb for retirement income is that your income during retirement should be 70% of your working income. Retirement usually means more expenses like travel and vacations, and leisure activities like golf. Don’t forget kids getting married, college fees for children and grandchildren, maybe even fees for your parents’ medical care.

In general, many people want to retire early, but few are prepared to do so. Our retirement system is set with an age of 65. You’re certainly allowed to retire early, but you need to keep in mind you may face reduced retirement income as well as significant tax penalties.

You’ll receive full Social Security benefits at the age of 65, but reduced benefits if you retire prior to the age of  65. If you do decide to pull your social security earlier, an option would be to leave your 401(k) investments to keep generating that tax-free income for a few more years. If you take from that 401(k) early, the IRS could take an additional 10% in early withdrawal penalties.

Also, keep your health care insurance costs in mind. If you retire prior to 65, there will be a gap between when your employer’s coverage ends, and Medicare begins. Private health insurance is of course available, but at a considerable fee.

Try to project as accurately as you can what you think you’ll need, and keep in mind that your needs may change, and unforeseen needs may arise.

Not Accounting for Taxes

Don’t forget that the money you’ve been putting into those IRAs, 401(k) plans, and 403(b) plans is not helping you avoid taxes. It’s merely helping you defer these taxes to a later date. You’ll pay those taxes whenever it is you withdraw the money.

If Social Security will be your only retirement income, there will be no tax on your benefits. Most of us aren’t retiring on Social Security alone, so half of that Social Security income is added into other retirement income to figure taxability.

Confusing Returns

Always remember that the average returns an investment earns are not the same as the returns it earns every year. Your goal should be to align your year-by-year returns to the average return you are hoping to achieve. A diversified portfolio is a good strategy as differed investments react differently to thing like interest rate changes, currency variation, investment phases, and so on.

Not Considering Inflation

The cost of everything keeps going up. You’re going to need more money for everything you buy today when you buy the same things when you’re retired. Your assets have to grow faster than inflation, and faster than you are spending them. A good strategy here is to try to control spending early in retirement, especially in that first year.

Remember, your retirement is in your hands. The earlier you start, the better. Those who save and invest along the way will have more assets than those who rely on pensions and Social Security income alone. Just remember to try and avoid the above-mentioned pitfalls along the way.