Nearing retirement, your thoughts start to drift farther and farther away from the job at hand and closer to what you’ll be able to do in all that free time - catch up on some reading, enjoy an afternoon on the back nine or travel the world with your spouse. But as you get closer and closer to your retirement party, it’s important to stop and assess your readiness for retirement. We’ve rounded up the common mistakes soon-to-be retirees make regarding their money, so you can prepare now to make your transition into retirement a bit smoother.
Mistake #1: Neglecting To Create a Retirement Plan
Interestingly enough, in a 2019 Retirement Confidence Survey, 8 in 10 retirees said they were feeling confident that they’ll have enough to live a comfortable retirement, yet only 42% (or 4 in 10) have actually attempted to calculate how much money they’ll need in retirement.1
The first (and one of the biggest) money mistakes any pre-retiree can make is not heading into retirement with a plan. Understanding how much you really need to retire before you reach retirement can give you time to adjust your savings strategies, portfolio allocations or insurance products. Additionally, it can help you and your spouse understand if your retirement expectations are going to be realistic or not.
Simply put, if you don’t understand how much you should have to retire comfortably, you won’t know if you’re on track.
Mistake #2: Waiting To Start Saving
Once you’ve created your retirement plan and discovered how much you and your spouse need for retirement, it may become more clear why you shouldn’t delay the savings process. This is especially true for folks that live in the Sonoma area, because the cost of living is high. And while tightening the budget and putting away extra now might feel hard to do, it’s important to remember that compound interest is on your side. Depending how the markets perform, what you invest your money in, and how many years away you are from retirement, what you put away now could grow exponentially by the time you retire. The best way to make this happen? Time. Give your money the years (or decades) it needs to collect interest and grow into what you’ll need in retirement.
Mistake #3: Underestimating Healthcare Long-Term Care Costs
Those between the ages of 65 and 74 spend an average of $6,723 in healthcare costs annually, not including any type of long-term care.2 Whether that sounds like a lot to you or not, the number can certainly add up over time and eat into your retirement savings, especially if an unexpected injury or illness occurs.
One way to help with the costs of healthcare is to understand your Medicare coverage and supplemental plan options. For every full 12-month period that you wait to sign up for Medicare upon becoming eligible, you may face a 10% penalty that gets added on to the standard premium. This penalty on the premium will have to be paid every year that you choose to use Medicare.3
Mistake #4: Underutilizing Tax-Advantaged Accounts
Never underestimate the impact taxes can have on your income now and through retirement. Both traditional and Roth IRA and 401(k) options can provide tax-advantaged opportunities that can make a difference in your retirement savings. Traditional retirement accounts reduce the amount of taxable income for the year they are created. For example, if your income is $60,000 but you put $4,000 into a traditional IRA, your taxable income for the year drops to $56,000. Roth IRA contributions are still taxed as part of your income for the year they’re added into the account, but then they are withdrawn from the account tax-free during retirement.
And if you haven’t heard, the IRS raised the contribution maximum for employer-sponsored retirement accounts in 2019 from $18,500 to $19,000 a year and IRA contributions from $5,500 to $6,000 a year for individuals under 50.4 That makes now an opportune time to begin catching up on your retirement plan contributions if you’ve found yourself falling behind in recent years.
Note: If you have not yet filed your tax return, due July 15, 2020, you still have the opportunity to max out your IRA contributions for 2019 to $6,000 before you file (if you haven't done so already). For employer-sponsored retirement accounts this is not the case.
Preparing for retirement can bring about a mix of emotions - excitement to leave the workforce and anxiety about affording your ideal standard of living, just to name a few. Putting in the work now to help avoid common retirement pitfalls could mean creating more peace of mind as you and your spouse look forward to enjoying your years of freedom ahead.
- https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19000-for-2019-ira-limit-increases-to-6000" rel="noopener noreferrer
Sonoma Wealth Advisors is a registered investment adviser and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. The information presented is for educational purposes and believed to be factual, but we do not guarantee its accuracy and it should not be regarded as a complete analysis. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice. An investment adviser representative should be consulted directly before implementing any investment strategy. Investments are subject to market risks and the potential loss of the entire principal amount invested. Past performance is no guarantee of future results.