Looking ahead to retirement isn’t just about putting the money away for retirement funds. You also have to recognize that you are entering a new phase of life and not only have to prepare for it but you need to avoid mistakes, according to The Motley Fool in “4 Retirement Planning Mistakes You Probably Don’t Even Realize You’re Making.”
Here are some mistakes to avoid:
Relying heavily on Social Security. If your financial plan for retirement is based only on income from Social Security, you won’t be retired for long. Millions of Americans who worked their entire lives enjoy the benefits of Social Security when they retire. Those benefits play a big role in keeping up with expenses. However, one income stream alone won’t cover your retirement living costs. Social Security was never designed to be the only income for retirement. It will only replace approximately 40% of your working income. If you earned more than the average worker, Social Security will cover even less of your prior income.
Most seniors need about 80% of their working income to live comfortably. You’ll need to make sure that your retirement income includes many other sources. This may mean a retirement plan like an IRA or a 401(k) that you fund while working. It may also mean working part-time (or full-time) during retirement, renting out your home or several other possibilities. The key point: Social Security will help out a little in retirement but it won’t be enough.
Thinking your living costs will drop dramatically. Unless you sell everything that you own and live in an RV (and there are many retirees who do that), chances are most of your cost of living will remain the same when you retire. For some people, the cost of travel and entertainment actually increases. Think about how you spend your money now. You’ll still need housing, food, a car and to pay for utilities. You may not need work clothes and you can eat lunch at home. However, everything else pretty much stays the same.
Except for healthcare. That is a cost that will only increase.
To avoid financial struggles in the later part of your retirement, map out a retirement budget that accurately reflects the real costs you’ll need to cover. If your savings are not healthy enough, then you may need to postpone retirement for a few years.
Ignoring catch-up contributions. For many people, saving for retirement doesn’t start until after the children leave the house, graduate from college or both. That’s why there are several opportunities for people who are 50 plus, to catch up on their retirement savings.
If you have an IRA and are at least 50, you can add $1,000 each year for an annual total of $6,500 (workers under 50 may contribute only $5,500). If you’re putting away money into a 401(k), you can make a $6,000 catch-up contribution for an annual total of $24,500 (compared to $18,500 for younger folks).
Paying taxes during retirement. If you’ve done a good job of saving and are receiving Social Security benefits, you may find yourself with more money than you’d expected—and a bigger tax bill than anticipated. You’ll get taxed a few ways in retirement:
- Unless you have a Roth IRA or 401(k), your withdrawals will be taxed as ordinary income.
- If your income exceeds a certain threshold, Social Security benefits will be taxable–up to 85%.
- Interest and investment income are also taxable.
An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances, as well as your options in preparing for retirement.
Reference: The Motley Fool (Sep. 12, 2018) “4 Retirement Planning Mistakes You Probably Don’t Even Realize You’re Making”