Planning Retirement? Avoid These 8 Mistakes For Comfortable Golden Years

Planning Retirement

Maybe that’s why the post-retirement life is called golden years! And you need to have a substantial fund to relax during these years.

Financial experts often advise saving for your retirement, right from the day you receive your first paycheck!

It’s true indeed!

At the same time, indeed we humans often make mistakes. But can we afford making mistakes while planning for our retirement?

No, obviously not! And that’s why we have listed some common mistakes which you should be aware of before planning retirement!

Here you go!

1. Not contributing enough for 401k retirement plan

Many companies offer 401k plans to their employees. So first, check whether or not your employer offers 401k! If yes, grab the golden opportunity immediately!

Many companies offer 100% employer match for your contributions. But usually the employer match is capped at a certain percentage (usually about 3% to 6%) of your pre-tax annual income.

You have to take full advantage of the employer match to reap the benefits during your golden years!

In 2019, you can contribute up to $19,000 annually to your 401k from your pre-tax annual paycheck.

But what if you don’t contribute enough to employer match?

For a year, you might think that it’s not a big loss for you. But if you see from a larger perspective, you will be losing a larger amount! Because you will miss the benefits of compound interest calculations, where you can earn interest on top of the interest you have already accrued!

According to a 2014 report by Financial Engines, people who missed out on $1,336 in employer contributions in 2014 will lose almost $43,000 over 20 years!

So, work hard and contribute to your 401k keeping the employer match in view!

2. Quitting a job before vesting

It is always advisable to make regular contributions to your 401k. And contribute at least the amount which matches your employer contribution.

If you are young and have started saving for your 401k, contribute to your 401k as much as possible!

But before we proceed, what is vesting?

It’s a term to mean how much of your 401k fund you can take if you leave the present job. Precisely, vesting in a retirement plan means ownership.

Well, the money which you have contributed is yours! But there is a catch in the employer match fund!

Vesting policy depends on company to company! In most cases, the policy ranges from about 3 to 7 years to be fully vested in 401k.

So before you plan for your job switch, go through the vesting policy of your company. You may coordinate with the human resources department to get a better picture of the vesting policy of your company!

But you might be in a limbo thinking, how vesting can hurt you?

Scenario 1: Let’s say your company has a vesting policy that increases the amount you are vested in your plan each year by 25%. That means you will be fully vested after working at the company for 4 years.

So, if you are planning to leave your company after 3 years, you will be 75% vested. In other words, you can carry 75% of your employer match contribution!

Scenario 2: Let’s say, your company has a stagnant vesting policy. That means, only after working for a certain period, you will be eligible for vesting. In that case, you may lose the whole amount of your employer match contribution!

So, before you switch jobs, check your company’s vesting policy about 401k!

3. Taking out a loan from a retirement account

Going through a financial crunch?

These are worth enough to tempt you to take out a loan against your 401k retirement account!

  • No loan application required
               
  • No minimum credit score needed
               
  • Pay off the loan within a maximum term of 5 years.

But why shouldn’t you borrow from your 401k?

Affects your paycheck: You have to pay off the loan through payroll deductions every month. So, you may see a large part of your paycheck going towards repaying your loan. And if you are already on a tight budget, you may find it more difficult!

Hurts your retirement nest egg: You won’t earn any interest on the amount you have opted for a loan. Besides, some 401k plans don’t allow you to contribute till the time you pay off your loan fully! Whatsoever, you are saving less or no money in your retirement fund, which affects your golden years!

You have to pay double taxes: Yes, you heard it right! You have to pay double taxes on your 401k loan. How so?

Usually, loan payments are made with the money after paying the required tax. And taxed for the second time when you will receive distributions during your retirement.

Affects your financial life: If you haven’t paid off your loan fully and have left or lost your job, you might be in a big mess!

You have to pay the outstanding balance amount within 60 days of your last working day!

So, always consider borrowing from your 401k as the last option to revive your finances. Because it drastically reduces the chances of your retirement readiness!

4. Cashing out your retirement plans

Contributions to your 401k are tax-deferred. In this year, you can contribute up to $19,000 to your 401k account. You don’t have to pay any tax on your contributions.

And you can contribute up to $6,000 this year into your IRA account. In this case, you need to pay taxes while making contributions to your IRA.

However, if you pull out money, before attaining 59​1⁄2 age, from your 401k or IRA, you have to pay a tax to Uncle Sam! Apart from that, you also have to pay a 10% penalty if you withdraw funds before attaining the above-mentioned age.

5. Not thinking wisely before rollover

A “rollover” means moving your retirement funds from one plan to another. Let’s say you are switching a job and willing to transfer your 401k funds to your new employer or move into IRA.

What if you have taken out a loan from your retirement account?

In that case, you should know about the 60-day rule before you opt for rollover. As we have discussed earlier, you have to repay the loan within 60 days if you are leaving the job. If you can’t repay your loan, you need to pay taxes along with hefty penalties!

Besides, your employer will withhold 20% from your account to cover potential taxes and penalties if you take possession of funds (that is, you have kept the loan amount with you).

You have to repay the amount from your own to bring up your account to the previous level.

Let me explain to you with an example!

Let’s say you are rolling over your 401k into an IRA by taking possession of funds. And you have:

Funds in your account = $20,000

Employer withhold (20%) = $4,000

Remaining funds in your account = $16,000

So, you need to pay $4,000 from your pocket to start your IRA.

Else, you can start your IRA with $16,000 only. But the withholding amount will be treated as an early withdrawal!

However, if you open a new account with $20,000, you might get back the withhold amount after filing income taxes!

6. Not mentioning the beneficiary name

You must be working hard to save for your retirement. That’s why it’s equally important to protect your assets even when you are not here.

So, you need to name your beneficiaries for your retirement account! If you don’t, your retirement funds will go to your estate being subject to probate. A probate is a legal process to check the validity and authenticity of a will. And this legal process is often lengthy and complex!

So, always update your beneficiary information because your will is even powerless over your retirement account.

7. Retiring with debts

According to the 2016 Federal Reserve’s Survey of Consumer Finances, 70% of the households in our country headed by people of ages 65 to 74 had at least some debts!

Paying off debts after your retirement is quite tougher than you think. The high Annual Percentage Rates, finance charges, etc. make you fall into the debt trap.

So, if you have taken out any loan during your active work-life, pay it off before you retire! And start paying off the bad debts first!

Let’s say, you have credit card debts. As obvious, you don’t use your credit cards for buying appreciating assets. You may use it for depreciating purchases like home furnishings, clothing items, gadgets, etc. So, the high-interest rates and low minimum payments make your credit card debts cumbersome!

However, credit cards have their benefits like reward points and all. But make sure to use them wisely. Otherwise, you may end up getting trapped in debt burden!

If you are already in the debt trap, opt for a suitable debt relief option to save yourself from it.

And start following effective ways to save for the future from now only. Always remember, being financially independent doesn’t necessarily mean to retire early. It means to get out of a 9 to 5 grinding job and do what you wish to!

8. Not being able to estimate retirement savings

“How much do I need to retire?”

Most probably this is the first question which comes to your mind while talking about retirement planning!

Well, you can follow the 4-percent rule! The rule of thumb says to find out your annual spending and multiply it with 25. The resultant will be your magic number. The magic number ensures that you can safely withdraw 4% of it every year after your retirement. Let’s say, your current annual spending is $50,000.

Therefore, your magic number will be $(50,000*25)= $750,000

So, $750,000 will be your target to save for your retirement to safely withdraw 4% every year!

You may follow another strategy to estimate your retirement savings.

According to the retirement planner Fidelity Investments, it’s advisable to save 10 times of your post-tax income if you want to retire by age 67.

It has chalked out a timeline to reach the magic number! Let’s see!

  • By 30: Have the equivalent of your salary saved
               
  • By 40: Have three times your salary saved
               
  • By 50: Have six times your salary saved
               
  • By 60: Have eight times your salary saved
               
  • By 67: Have 10 times your salary sav

If you are planning to become financially independent, you have to do some calculations! The calculation of financial independence (FI) has two parts.

The total amount of money required to have a sufficient income for life is your FI number.

FI number = Yearly expenses/ Safe withdrawal rate

The second part is how many years it will take to reach FI!

Years to FI = (FI number – amount already saved) / Early saving)

However, whatever strategy you follow, make sure to invest in your retirement accounts regularly, to grow your money for your golden years.