In the best of worlds, individuals start saving for retirement the first paycheck they receive. While some of us might have been savvy enough to actually think about the idea of a retirement account in our 20s, less than one percent of workers actually start and stay committed to adding to one their entire work life. In fact, the most common time for folks to start their planning for retirement is in their late 40s and 50s, when retirement is now a real possibility in the not-so-distance future.
Yet, even with increased experience and knowledge, there are some big mistakes people can make in what we call the “Retirement RedZone” (it’s a sports reference, ask a friend). To make matters worse, the effects of these decisions may not be realized until it’s too late to make a significant change.
- Not Having a Vision – You know the old saying: “Begin with the end in mind”. It’s important to have a vision for retirement. How are you going to spend your time? Will you work part-time? Start a new business? Volunteer? Travel? The possibilities are endless. However, if you try to plan for all these things when retirement arrives you may find you lack the resources to live out that vision or worse, you may have been able to retire from a job you didn’t love much earlier!
- Assuming Taxes Will Be Lower – Most people assume that they will be in a lower tax bracket in retirement. While this may be the case, it isn’t always. For some people much of their nest egg is in pre-tax retirement accounts such as a 401k or IRA. This leaves them with little flexibility in their taxable income and may lead to being in higher tax brackets, having more of their social security taxed and higher Medicare premiums! If you are approaching retirement, it may make sense to consider adding to a taxable investment account, Roth 401k or doing Roth conversions in order to increase your tax diversification. This may be especially prudent now with reduced tax rates under the Tax and Jobs act of 2018.
- Putting off Insurance – All though nothing is for sure, we can assume this with relative certainty: any kind of life or long term-care insurance you buy will be cheaper now than 20 years from now. That’s because you’re a higher risk as you age.3 If you can afford it, consider if long-term care and life insurance would be a good compliment to your savings and avoid paying through the nose for it later when you may need the coverage.
- Making a Mess of Medicare – If you’re not working on your 65th birthday then you’ll want to sign up for Medicare 3 months before your birthday. However, if you are still working things are not so clear. Depending on the number of employees at your company, you may be required to sign up for Medicare Part B even if you have health coverage through work. You’ll also be eligible for Medicare Part A with no premium, however, signing up may eliminate your ability to contribute to your HSA. If you are required to sign up for Part B and fail to do so in a timely matter, you could be hit with a 10% premium penalty for life!
- Not Factoring Social Security Into Your Plan – Social security is complex to say the least. In order to make the most of all the money you have put into the system, its important to understand the rules and how they effect your claiming strategy. This could be even more important when considering how to coordinate a couple’s benefits, as well as your claiming decisions impact on Survivor benefits. If you are uncertain what the ideal strategy is for you, it may be wise to consult someone with expertise in this area. It’s also important to make your decision within context of your overall retirement income plan. Ideally, this strategy will be in place years before your actual retirement date.
- Moving Without Considering Retirement – Americans like to move. As a country, we are more prone to change geographically every generation than most other countries. But that wanderlust has a price, and if we move to a location and don’t consider the cost of living, we may pay for it (literally) in our retirement years. The higher average income may make up for the Cost of Living in, say, California during your working years, however, you may need to have a larger nest egg to support yourself in retirement. Be sure to plan accordingly.
Having a successful retirement is easier said than done. Avoiding these 6 common pre-retirement mistakes should put you ahead of the curve. As always, everyone’s individual situation is unique. If you’d like to talk more about yours, feel free to reach out today!
The Roth IRA offers tax deferral on any earnings in the account.Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59.5 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax.Future tax laws can change at any time and may impact the benefits of Roth IRA’s. Their tax treatment may change.
Traditional IRA account owners should consider tax ramifications, age and income restrictions in regard to executing a conversion from a Traditional IRA to a Roth IRA. The Converted amount is generally subject to income taxation.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.