Creating passive income to get you through your golden years should be an ongoing task while you’re working. Unfortunately, many people wait too long to start their retirement planning. That’s a crucial mistake that limits the financial resources you’ll have available when you leave the workforce. Read on to learn about this and other retirement missteps you can avoid.
1. Not saving during your younger years
Retirees often wish they could go back and tell their younger selves to invest more into their retirement savings. Starting in your thirties can produce a higher retirement income and a more fulfilling life in your seventies. One of the biggest mistakes young professionals make is thinking they have plenty of time to think about retirement. Start now. It will pay off later.
2. Not calculating your retirement needs
Most of us consider our other needs before depositing into our retirement account. That’s a mistake, particularly if you’re making tax-deferred contributions to a 401(k) or traditional IRA. Calculate how much you need to live comfortably in retirement and make contributions based on that number. Failing to do this will lead to financial struggles as you age.
3. Counting only on social security benefits
Despite what you may have read online, it’s unlikely that the federal government will allow the social security trust fund to run dry. That doesn’t mean there won’t be changes in how they calculate distributions. Relying strictly on social security benefits for retirement income is not a good idea. It’s a limited fixed income. You’ll need more than that to survive in retirement.
4. Not maxing out a 401(k) match
A 401(k) match from your employer is a gift. If your company offers one, take advantage of it. Max out your 401(k) contributions to get as much as possible in the match, whether it’s stock or cash. The additional returns you get from doing that will add up exponentially over the years you continue working.
5. Taking out social security income before age 70
Retiring early and taking social security benefits at age 62 will limit your income for the rest of your life. It’s better to refrain from doing this and continue working, even if just on a part-time basis. Waiting until age 70 to collect social security benefits ensures you’ll get the maximum amount available. As stated above, the SSA trust fund will still be there.
6. Tapping into your Roth IRA too early
Financial planners usually recommend opening a Roth IRA to give yourself additional retirement savings. Contributions to a Roth IRA are made after taxes have been taken out, so distributions are tax-free. You’ll want to save those for last to eliminate tax liabilities later in your retirement. Taking them first could leave you with tax liabilities on other retirement accounts.
7. Taking distributions at age 59 ½
The IRS allows you to take penalty-free distributions from your retirement accounts when you reach the age of 59 ½. That doesn’t mean you should do it. Required minimum distributions (RMDs) don’t kick in until age 72. To ensure higher retirement income, leave your money in the retirement savings account as long as possible so it can continue growing.
8. Overreacting to market volatility
Don’t overreact to market volatility. Choose stocks with a history of consistent returns and ride out the down periods. It’s a marathon, not a sprint. A good example of this is the major tech stocks like Amazon and Netflix that showed losses in 2022 but are steadily regaining lost ground in 2023. Established companies often do this, so don’t overreact when they dip.
The Bottom Line
Retirement planning requires careful preparation and consistency. Start saving early if you can. Calculate how much you’ll need for a comfortable retirement, and don’t rely solely on social security benefits. Max out 401(k) matches, don’t take social security before age 70, and save your Roth IRA for last. Wait until age 72 to tap into your retirement funds if you can, and don’t overreact to market volatility. The market always produces returns if you weather the storms.
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