We all want to enjoy a comfortable retirement. But in order to do that, we need to avoid making some major mistakes. Here are the seven biggest retirement mistakes, and how you can avoid them.
Not saving early enough (or at all)
The earlier you start saving for retirement, the better. The power of compound interest ensures that your money will grow exponentially the longer it has to grow. So, if you start saving in your 20s or 30s, you’ll be in much better shape than if you wait until you’re 50 or 60.
Not contributing enough to your 401(k) or IRA
If your employer offers a 401(k) match, make sure you’re contributing enough to get the full match. That’s free money! And even if your employer doesn’t offer a match, try to contribute as much as you can to take advantage of the tax breaks. For 2020, the 401(k)-contribution limit is $19,500 (or $26,000 for those age 50 and over). The IRA contribution limit is $6,000 (or $7,000 for those age 50 and over).
Withdrawing from your retirement accounts too early
When you withdraw money from your 401(k) or IRA before age 59 1/2, you’ll have to pay a 10% penalty on top of regular income taxes. Ouch! So unless it’s an absolute emergency, leave your money alone until you’re ready to retire.
Not diversifying your investments
Investing is all about minimizing risk while maximizing return. One way to do that is by diversifying your investments across different asset classes (stocks, bonds, real estate, etc.). That way, if one asset class takes a hit, another may not be affected—or may even increase in value.
Relying too heavily on Social Security income
Social Security was never meant to be someone’s sole source of income in retirement—it was designed to supplement other sources of income like pensions and personal savings. According to the Social Security Administration, the average retired worker receives about $1,461 per month from Social Security (or about $17,532 per year). If that’s all you have coming in, it’s not going to be enough to live comfortably—especially if you’re retired for 20 or 30 years! Of course, there’s no reason why you can’t rely on Social Security as part of your retirement income—just don’t make it your only source of income.
Not having a plan
Creating a retirement plan doesn’t have to be complicated—but it is important. After all, how can you achieve something if you don’t know what it is? At a minimum, your retirement plan should include when you’d like to retire and how much income you’ll need each year. Once you have that figured out, you can start working backwards from there.
Withdrawing all of your money at once
When it comes time to start withdrawing money from your retirement accounts, resist the urge to take everything out at once! Instead, consider taking periodic withdrawals over several years — that way, you won’t put all of your eggs in one basket (i.e., the stock market) and You’ll also minimize the amount of taxes you’ll pay on withdrawals. Win – win!
Nobody wants to make costly mistakes when planning for retirement — but unfortunately, they happen all too often. By avoiding these seven common mistakes, however, you’ll be well on your way toward achieving financial freedom in retirement!
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