Don’t Let These Retirement Planning Mistakes Cost You!
When it comes to retirement planning, the details can often start to feel overwhelming. Between the different types of plans, the rules and regulations associated with them, and each person’s unique situation, it’s all too easy to get lost.
But there are some important – and more simple than you might expect – mistakes that anyone planning for retirement needs to avoid. From taxes to health care, don’t let these slip by you.
Retirement Planning Mistake: Relying On Social Security Or A Company Pension Plan
A common illusion is believing someone else will take care of retirement planning for you.
You’ve been lead to believe you don’t have to be responsible because you’re part of a company pension plan and have government guaranteed Social Security. “They” have it covered for you, right?
Well, sort of…
As a brief summary, what the article points out is the paternalistic days of employers and government providing a guaranteed income for life are coming to an end.
Depending on your age, number of years to retirement, and the company you work for, you may want to get serious about taking retirement planning into your own hands. Otherwise, you risk being in for an ugly surprise.
Many traditional defined benefit plans are grossly under-funded, and more are being converted to defined contribution plans. Health benefits are being eliminated, and Social Security is actuarially unsound.
The new reality of retirement planning means your role and responsibility has shifted from passive to active. You either get in the driver’s seat to secure your retirement income needs, or face an insecure retirement as a consequence. The choice is yours.
The smart thing to do is take retirement planning into your own hands. You can’t rely on anyone else to get it done
Retirement Planning Mistake: Not Maximizing Tax Deferral
Uncle Sam has played an important role in shifting the burden of responsibility for retirement planning onto your shoulders, and in a rare moment of generosity and wisdom, he created a variety of tax incentives to encourage individual retirement savings. Not utilizing tax incentives to maximum advantage is a mistake.
For example, contributions to a 401(k), 403(b), and other employer sponsored retirement plans both reduce taxable income and allow your money to grow tax-deferred.
If that weren’t enough to motivate you, many employers offer a savings matching plan which is tantamount to free money. Amazingly, many employees walk right past those tax savings and free money by never contributing to their plans. That’s a big mistake. Use it or lose it.
For example, let’s assume you’re in the 30% tax bracket (state and federal combined) and your company matches 50 cents for every dollar contributed to your plan up to 6% of salary (this formula is widespread).
If you contributed $5,000 within that 6% limitation, the tax savings would approximate $1,500 and the match would equal $2,500 of free money, creating $4,000 of added benefits from your $5,000 contribution – plus you still have the original $5,000 you put in.
In essence, it hardly cost you anything to build your savings, you got an immediate 50% risk free return on your investment, and all of the money will grow tax-deferred in your account, creating even more savings long term.
Clearly, this is a no-brainer, low-pain savings strategy that everyone should be maximizing – yet many don’t. According to Census Bureau data, an estimated 58.2% of all workers don’t own a retirement savings account of any kind. That’s a mistake.
Even if you aren’t covered by a 401(k) or 403(b), there’s an alphabet soup of retirement plans awaiting your funding that will give you some mix of tax-deferred growth and current tax savings.
This includes SIMPLEs, IRAs, Roth IRAs, SEPs and many more. Because this area of the law changes rapidly, you’ll need to talk to your accountant or financial advisor about your personal situation and which retirement plans may be right for you.
– via Financial Mentor
Don’t Underestimate Health Care Costs
One of the biggest mistakes you can make while retirement planning is undervaluing the cost of health care later in life. Health care costs doesn’t just mean doctor’s appointments or the rare ER visit, it also includes any care you might need down the line.
No one likes to think about the negative or scary “what if”s, but by planning for the worst, you’re protected and can have more peace of mind to enjoy your life now and for many years to come.
Disregarding Higher Health Care Costs
One of the most overlooked areas of retirement planning is estimating what health care costs could be in retirement, and including this in the calculation of income needs. Fidelity estimated that a 65-year-old married couple that retired in 2012 will incur an average of $240,000 in healthcare costs alone in retirement. By overlooking this large potential outlay, retirees could feel strapped for cash in their most vulnerable years.
Often, people assume Medicare will cover these expenses in retirement but this simply is not true. Medicare costs to retirees are rising each year so it’s important to know what to expect.
No Long-Term Care Plan
Anyone who has cared for an aging parent knows first-hand the toll it can take on their loved ones and their savings. Both the time and money needed to provide quality care can be staggering.
According to the US Department of Health, 70% of people over 65 will require care at some point in their lives. In the DC metro area, the median annual rate for a private room in a nursing home is $109,580 and it costs $20 per hour for Home Health Care services, in 2013. Genworth has a terrific interactive state-by-state guide to help calculate future long-term care costs.
Given that 50% of claims last more than one year and medical costs are projected to continue rising faster than inflation, these costs adds up quickly.
It’s important to know your long-term care options and how you plan to pay for these future expenses if you need to.
– via Forbes
What does your retirement planning look like right now?