You could spend 30 years or more saving for retirement. Getting it right could mean the difference between struggling or living comfortably after you stop working.
As your life changes and your goals shift, your retirement journey may not follow a completely straight path. But no matter how much the road twists and turns, avoiding these five blunders can help you reach this monumental goal faster.
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1. Not contributing as much as you can to your 401(k)
Reaching the maximum contribution limit for your 401(k) each year -- which is $19,500 for 2021 if you are under the age of 50, and $26,000 if you are 50 or older -- may not be attainable. But contributing whatever you are able can still benefit you.
Among those advantages are tax-deferred growth of your contributions. You'll also receive a reduction in your taxable income for any contributions you make to a traditional 401(k). So if you make $60,000 and can add $10,000 to this account, your taxable income will be reduced to $50,000 in that year. With this type of account, you will eventually owe taxes on your withdrawals in retirement, but by then, you could be in a lower tax bracket than when you were working.
Another benefit of a 401(k) is any match by your employer. A company that matches will contribute an amount based on your own contributions, up to a certain percentage of your salary. For example, if your company matches your contributions dollar for dollar up to 5% of your income, and you make $50,000, you can receive up to $2,500 in free money through a match. Making sure you contribute at least enough to earn your full employer match can help you meet your goals faster.
2. Not planning for how much you'll need in retirement
Everyone needs a different amount of money in retirement. Figuring out how much you'll need involves assessing what your future will look like. Will you receive Social Security benefits and a pension after you retire, or just Social Security? Will your expenses be the same as now, or will you work toward reducing them leading up to retirement?
The more income sources you have and the fewer expenses, the less you will need in savings. You should also consider the return are you receiving on your investments and how long you have until you retire.
You can just put money into a 401(k) and hope for the best. But using a calculator to come up with a retirement number unique to you will leave you better prepared and less stressed.
3. Not investing your money appropriately
If you add money to your 401(k) or IRA and never invest it, it just sits in cash not earning much. If so, you'll get the tax savings these accounts can offer but not the tax-deferred growth.
Investing your retirement savings into stocks and bonds can also help it grow faster. If you contribute $6,000 to an IRA each year for 20 years and it earns 9% on average, it could grow to almost $264,000. Over 30 years, it could hit $609,000. But if you contributed without investing any of it, you would only have $120,000 after 20 years and $180,000 after 30 years, assuming you don't earn interest.
Between 1926 and 2019, owning a portfolio made up of 60% stocks and 40% bonds would've yielded you a 9% rate of return on average. .It's important that you remember though that the rate of return you receive depends greatly on the market cycle you invested in. For example, if you held a much more aggressive portfolio of 100% large-cap stocks between the beginning of 1991 and the beginning of 2021, you would've only earned an 8.5% average annual return.
4. Dipping into your retirement savings
You can borrow up to 50% of your 401(k) balance up to a max of $50,000. There are also some hardship exemptions like paying for medical expenses that allow you to take money from the account. With a loan, you'll be responsible for paying the money back. If you don't, you could owe penalties and taxes. With hardships, you don't have to repay the money, but you will owe taxes on your withdrawal -- and your account balance will get permanently reduced by the amount you take out.
Growing your accounts is more difficult if you periodically take money from them. There may be times when you absolutely cannot avoid dipping into your retirement savings, but you should limit these as much as possible. Instead, when an emergency comes up, try to find other ways to deal with it.
5. Not planning for inflation
You may look at your retirement savings balance and be falsely lured into thinking it's plenty. While it could be enough if you retired today, you must consider that your purchasing power will erode over time as inflation raises the costs of goods and services.
The average annual long-term inflation rate between 1913 and 2019 is 3.1%. That means that you'll need $1,250,000 30 years from now to match the spending power that $500,000 has today. Including this crucial factor in your retirement projections can help ensure you don't outlive your savings.
You plan for retirement so you can enjoy it, but finally getting there and discovering you don't have enough could be devastating. Avoiding the errors listed above starting now will help make the most of your savings and avoid this outcome.
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February 15, 2021 at 06:02AM
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5 Retirement Planning Blunders to Avoid at All Costs - Motley Fool
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