According to a Northwestern Mutual study, one in three Americans has less than $5,000 in retirement savings. Another 21% of Americans have no retirement savings at all.
While most people know that not saving at all is one of the biggest money mistakes in retirement and personal financial planning, there are plenty of other errors you can make, as well. Unfortunately, making mistakes in your retirement planning can cost you thousands of dollars over time.
Consider some of the top financial mistakes that the average American makes when planning for retirement. Once you understand the potential error, you can evaluate your finances to determine whether you need to make some changes to avoid these common pitfalls.
1. Failing to Take Full Advantage of Employee Match Contributions to 401(k)
One report indicated that Americans are leaving a total of roughly $24 billion in unclaimed 401(k) matches on the table every year. On average, that means that a single person is losing out on an extra $1,336 each year, which is often an extra 2.4% of their annual income.
If your employer offers a 401(k) match, it is absolutely in your best interest to take full advantage of that match. Over time, that money can add up to be thousands of dollars in your account, and, with the power of compound interest, that can significantly increase the amount of funds in your account when you retire.
2. Forgetting to Consider Taxes
Depending on how you have set up your retirement accounts, there is a good chance that at least some of the income you will receive in retirement is taxable. Some seniors forget that they will need to account for paying Uncle Sam a portion of their retirement funds. For some, that portion can be a significant drain on their tax savings.
Keep in mind that most draws from your IRA and 401(k) are subject to income taxes. Many Social Security benefits will be, as well. It may be a good idea to consider Roth plans, which contribute post-tax dollars today so that you do not have to pay taxes on distributions later.
3. Starting Social Security Benefits Too Early
Everyone falls into a different age bracket that dictates when they will qualify to take their full amount of Social Security benefits. For example, if you were born between 1943 and 1954, your full Social Security benefits will start at age 66. That number increases if you were born after 1954. For those who were born in 1960 or after, for instance, their full retirement age is 67, rather than 66.
You can actually start taking benefits when you reach age 62. The catch is that if your start receiving benefits at age 62, you will not get the top amount that you could obtain, and you are stuck with whatever rate you get when you start if you do not wait to take full benefits. If you begin taking benefits at age 62, for example, the total amount of benefits you receive is reduced by 25%.
If you delay taking Social Security as a retiree past your full retirement age, you might also be eligible for delayed credit. This increases the amount of money you can get if you delay, up to age 70. Delaying to age 70 can increase your benefits by nearly 25% in some cases.
4. Cashing Out Your Retirement Accounts
When you leave a job, your 401(k) or other retirement savings account should go with you. However, that does not mean that you should cash it out and use the funds. Instead, rolling over the money will keep your retirement savings intact so you can keep taking advantage of compound interest.
Rolling over the account also helps you avoid paying extra taxes and penalties. If you cash out too early, you may end up paying a good chunk of the funds to Uncle Sam. You might end up wasting up to 10% of the funds in penalty fees as well.
5. Failing to Have an Emergency Backup Plan
Even if you have enough funds for all of your expenses in retirement, you need to also plan for an extra cushion to account for emergency situations. Even if you do not have a chronic health problem now, for example, you may end up being injured or becoming ill, and that can seriously derail the amount of funds you need to keep up with obligations in retirement.
Work with our office to discuss how you can build in an extra cushion that will help you deal with the unexpected more effectively.