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5 Common Retirement Planning Mistakes That Could Hurt Your Savings

5 Common Retirement Planning Mistakes That Could Hurt Your Savings

| September 19, 2022
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You do not want to retire broke or be a part of the millions of Americans living on the edge of poverty. You need a solid retirement plan that steers you away from common pitfalls. These mistakes, however small, may derail your entire retirement strategy. Here are some of the biggest mistakes people make and how to avoid them.

1. Underestimating Inflation

Rising expenses can put your retirement savings at risk. Expenses can grow beyond your fixed retirement income, and you may be forced to downsize your spending. This could cause a dramatic change in your lifestyle, which may cause you to withdraw money from your investments during a bear market, worsening your retirement plan. To deal with inflation, the government may raise interest rates, which can negatively impact your fixed-income investments.

 One way to offset the potential effects of inflation would be to maximize your retirement contributions while making smart investments. Asset allocation is the main factor that affects how well a portfolio does over time, and over the long term, stock returns have usually been much higher than inflation.

2. Not Having An Emergency Fund

When you face a financial emergency, which you are bound to if you are not prepared, you will be forced to use a high-interest credit card, take out a personal loan, or withdraw from your retirement savings. Taking on high-interest debt is bad enough, but tapping into your retirement fund can cost you exponentially down the line.

 Retirement savings grow over the years because of compound interest but only if it is untouched. The tiniest amount withdrawn today can cost you thousands down the line hurting your savings goals. All you need is an easy-access emergency fund of at least three to six months of living expenses to ensure this never happens to you.

3. You're Not Considering All Your Retirement Expenses

It might be hard to know your health care needs once you retire. Remember that you might have to pay for more than Medicare, prescription costs that your insurance doesn't cover, dental and vision care, or long-term care. Even though it can be hard to know your medical needs in retirement, figuring out how much they will cost and making a plan can help you avoid bad financial outcomes.

 Some medical premiums, like those for Medicare and long-term care insurance, can be paid with money from a Health Savings Account (HSA). Even in your 50s, you can still get the most out of these plans by using catch-up and employer contributions. People 55 or older can make an extra $1,000 per year, called a catch-up contribution.

4. Stashing Money In A Savings Account

Growing your money during your working years is important, and a regular savings account isn't the best place to do so. When interest rates are low, the growth you can expect from savings account interest payments may not even keep up with, let alone outpace, inflation. And if your money does not keep pace with inflation, it loses value.

 You need to invest your money in a financial vehicle that exposes you to assets, such as stocks, which historically have outperformed savings accounts over the long term. An employer match program, such as a 401(k), can also be a good option, but if you don't have access to one, you should invest in an individual retirement account (IRA). Traditional IRAs, Roth IRAs, and employer-sponsored retirement plans such as 401(k)s or 403(b)s are not taxable. Furthermore, you can deduct contributions to traditional IRAs and non-Roth employer-sponsored retirement plans on your taxes. A Roth IRA allows you to withdraw funds tax-free during retirement.

5. Not Paying Off High-interest Debt

Retiring with debt is widely regarded as a significant financial misstep because every dollar you owe reduces your income in retirement. You may believe you can pay your bills, but you are probably thinking about your ability under ideal conditions or when you have an income.

 If you are nearing the end of your working years and want to get out of debt but are still saving for retirement, you may need to work longer, live on less, or sacrifice to pay off the debt before retirement. But if it is possible to safely and securely pay off debt during retirement, then there is no need to be stingy with your retirement fund contributions. Near-retirees must ensure that they have enough savings and their investments do not outlive their money.

 Paying off high-interest debt will put your retirement funds at risk, especially when living on a fixed income. So you must pay off as much of your high-interest debt as possible before retirement and stop taking on more debts of this kind. You can consolidate your credit cards if you have a lot of credit card debt, or you can look into payday loan settlement programs if you have payday loans that are spiraling out of control. You can tap into your home equity to pay off other high-interest loans because the longer you wait to pay them off, the more expensive they will become.

The Bottom Line

Retirement is one of your most important financial goals, and while many of us have many years or decades before we retire, small decisions you make now can significantly impact your golden years. When it comes to retirement planning, everyone makes mistakes. However, some mistakes are costlier, with the worst offenders costing thousands of dollars down the line. However, by avoiding a few common mistakes, you can keep your retirement planning on track and ensure you're doing everything possible to have your dream retirement.


About the Author:

Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a principal attorney.



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