As you dream about 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 friends, family and/or spouse. But to be ready for your retirement party, it’s important to assess your readiness for that phase of your life. And the earlier you do this, the better. Here are four common mistakes future retirees should avoid regarding their money, so you can make your transition into retirement a smooth one.
Mistake #1: Neglecting To Create a Retirement Plan
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
One of the biggest money mistakes any pre-retiree can make is not heading into retirement with a plan. Understanding how much money you really need to retire before you reach retirement can give you time to adjust your retirement lifestyle expectations, age of retirement or savings strategies.
Simply put, if you don’t understand how much your retirement lifestyle will cost and how much you need to have saved to support it, you won't know if you are on track. The first year of retirement is not a good time to find out you under saved.
Mistake #2: Waiting To Start Saving
Once you’ve created your retirement plan and discovered how much you need for retirement, it may become clearer as to why you shouldn’t delay the savings process. And while putting away 15% of your pay now might feel hard to do, it’s important to remember that due to the magic of compound interest, your contributions could potentially turn into hundreds of thousands or even millions in retirement (depending how the markets perform, what you invest your money in, and how many years away you are from retirement). The best way to make this happen? Time. Give your money the years or decades it needs to grow into what you’ll need in retirement.
Mistake #3: Underestimating Healthcare Costs
In 2019 it was estimated that an average healthy 65 year old couple would need close to $400,000 to cover healthcare expenses, including Medicare Parts B and D, according to HealthView Services. If you have chronic health conditions you will probably spend more. Perhaps, ironically, if you are very healthy you could also spend more because you will probably live longer than the average age of 84 (men) or 86 (women).
Do not forget to account for dental and vision care, which are some of the biggest blind spots for retirees as original Medicare doesn't cover these expenses.
One way to help with the costs of healthcare is to understand your Medicare coverage and supplemental plan options such as Medigap or a Medicare Advantage plan. Shop around for the best type of plan, looking at the coverage and the cost that is best for you.
Finally, once you reach 65, do not delay signing up. For every full 12-month period that you wait to sign up for Medicare upon becoming eligible, you 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 use Medicare.2 This will not apply if you are working at a company with 20 or more employees and have coverage at work that is at least as good as Medicare. But once you retire you will need to sign up for Medicare right away.
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 $6,000 into a traditional IRA, your taxable income for the year drops to $54,000. 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.
In 2020 the IRS will let you contribute up to $19,500 a year for 401(k)'s and $6,000 into you IRA's with additional contributions of $6,500 and $1,000 a year for individuals age 50 or older.
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 look forward to enjoying your years of freedom ahead.