When you transition into retirement, your daily routine will change in many ways. In addition to getting your income from new sources, you can expect to have different commitments. You might have additional time to pursue hobbies or help others. You may decide to stay home more than you did during your working years. Or you could end up traveling extensively as you take advantage of your freed-up schedule.
To prepare for this stage, which could last decades, you’ll want to think about your upcoming needs. This will often include budget and lifestyle considerations. If you can avoid financial pitfalls and other retirement planning mistakes, you’ll increase your chances of enjoying a comfortable retirement.
Here are some of the most common retirement planning mistakes:
— Not getting an early start.
— Reducing your savings over time.
— Agreeing to support adult children.
— Overlooking contribution opportunities.
— Putting your funds in one place.
— Carrying too much debt.
— Not considering housing possibilities.
— Overestimating your nest egg.
— Assuming you’ll have coverage.
— Forgetting to plan for taxes.
— Banking on Social Security.
— Ignoring long-term care.
Not Getting an Early Start
Waiting until your 40s, 50s or later to save for retirement means your investments will have a shorter time period to earn interest and grow. “Starting early allows you to take advantage of compounding returns and build a larger nest egg over time,” says Daniel Callahan, partner and chief investment officer at Capasso Planning Partners in Charleston, South Carolina.
Reducing Your Savings Over Time
If you start setting aside 10% to 15% of your income each year but reduce that percentage over time to take vacations or pay for home renovations, your long-term portfolio growth could suffer. “Failing to save enough for retirement is a common mistake,” Callahan says. See what retirement accounts are available to you, such as a 401(k), IRA, Roth IRA or other employer-sponsored plan. Check your budget and consider setting up automatic withdrawals each month so you won’t be tempted to spend the funds elsewhere.
Agreeing to Support Adult Children
If you lend a hand to adult children, they may appreciate the assistance and even come to rely on your financial backing. But you could find it more difficult to save for yourself. “Parents want to make life a bit easier by helping with tuition or paying for a wedding, but it’s important to plan for your retirement first,” says Angie O’Leary, head of wealth planning for RBC Wealth Management U.S. in the Minneapolis-St. Paul area.
Overlooking Contribution Opportunities
When you turn 50, you’re allowed to put extra funds into retirement accounts such as a 401(k) or IRA. “Take advantage of your employer matching contributions, catch-up contributions and other incentives that will shore up your reserves for the future,” O’Leary says.
Check your contribution limits and if possible, adjust your budget so you can maximize your savings each year. Also find out if your employer matches some of your contributions. You may be able to receive additional funds through your workplace policies. Some companies offer to match up to 50% of your contribution up to a certain amount each year.
Putting Your Funds in One Place
Investing solely in stocks or stashing all your savings in a money market fund creates little balance. “Relying too heavily on a single investment or asset class can be risky,” Callahan says. “Diversify your portfolio across different asset classes, such as stocks, bonds, real estate and other investments to manage risk and potentially increase returns.”
[SEE: 6 Low-Risk Investments With Steady Returns for Retirees]
Carrying Too Much Debt
If you go into retirement with high credit card balances, the payments could impact your budget. You’ll have less to spend on activities and entertainment and might have to pay high interest rates. If you can, look for ways to reduce debt or eliminate it altogether before retiring. Some people nearing retirement pay off their mortgage as well.
Not Considering Housing Possibilities
If you don’t know where you want to live in retirement, now is a good time to begin research. The cost of living can vary greatly from place to place, and if you opt to spend winters in a different location, you’ll need to factor in those expenses. Look for a place that will accommodate your interests and budget.
Overestimating Your Nest Egg
With each year, prices tend to go up. During periods of high inflation, they increase at a faster rate. “Inflation erodes purchasing power over time,” Callahan says. “Failing to account for inflation when estimating retirement needs can lead to inadequate funds.”
Assuming You’ll Have Coverage
If your employer provided benefits like health insurance or life insurance, you’ll want to check how you’ll cover those areas in retirement. Medicare is available for those who are 65 or older, and if you retire before then, you’ll need to find coverage on your own or through a working spouse.
Forgetting to Plan for Taxes
The amount of taxable income you receive in retirement will impact your available funds. “There’s a myth that you will be in a lower tax bracket, but that is not the case for most retirees, especially those who planned well financially,” says Jovan Walker-Jackson, an investment advisor with Good News Financial & Investment Advisors in Largo, Maryland. “Many go from one source of income to three to five sources, keeping them at the same or higher tax brackets.”
[See: 10 Ways to Reduce Taxes on Your Retirement Savings.]
Banking on Social Security
While the Social Security Administration provides benefits to those who have paid taxes and earned enough credits, you might want additional sources of income. “Relying solely on Social Security may not provide sufficient income to maintain your desired lifestyle in retirement,” Callahan says. You can set up a my Social Security account and calculate your estimated benefits as you set a budget. That way you’ll be able to see what you can expect from Social Security and how much you might need from other income streams.
Ignoring Long-Term Care
Having a power of attorney in place and an up-to-date will can make it easier for loved ones to help in the future. “These all ensure your financial and personal wishes are carried out and reduce stress for potential caregivers and future beneficiaries,” O’Leary says.
More from U.S. News
Costs to Include in Your Retirement Budget
The Best Retirement Planning Books For 2023
How to Reduce Your Tax Bill by Saving for Retirement
Retirement Planning Mistakes to Avoid originally appeared on usnews.com
