3 Common Retirement Planning Mistakes – And How To Fix Them
Retirement is not the kind of thing you should be diving into. In fact, you should really spend most of your working life planning for this step, which includes saving regularly, investing wisely, and, as you get older, lowering the appropriate age for ending your career.
But even if you go to great lengths to plan for your retirement, you can run into problems. Here are some all-too-common mistakes people make on their way to retirement – and how to avoid them.
1. Relying too heavily on social security
Many people assume that when they retire, Social Security will allow them to cover most or all of their bills. In fact, the average senior today earns $ 1,543 a month.
If you’re an average wage earner and your Social Security benefits end up making up the bulk of your retirement income, you could find yourself in trouble. Also, just because the typical senior on Social Security receives $ 1,543 per month, doesn’t mean that this is what your benefit will look like. You may be entitled to a lot more money than that, or a lot less.
That’s why it’s a good idea to get an estimate of your monthly benefits in advance, and you can do this by accessing your Social Security income statement, which is issued to you once a year. The closer you get to retirement, the more accurate this estimate will be, but even if you’re in your 30s or 40s, you can use that as a starting point.
If you are at least 60 years old, your income tax return should arrive in the mail every year. Otherwise, you can create an account on the Social Security Administration website and view it there.
Keep in mind that your Social Security filing age will also determine your monthly benefit amount. But having an estimate in advance can help you plan better for the future.
2. Set a random savings goal
Many people, as part of their planning, set a retirement savings goal that is arbitrary. For example, you will often hear that a million dollars will give you financial security for the rest of your life. But rather than focusing on a specific number, like $ 1 million, you should aim for a total savings that is a multiple of your income.
A good rule of thumb is to retire with 10 to 12 times your savings end salary saved. If you are making $ 100,000 per year then yes you might want to aim to retire with $ 1 million. But if you earn $ 50,000 a year, you could end up leading a very comfortable life as a senior if you manage to close your career with $ 500,000 to $ 600,000 in your IRA or 401 (k) plan.
3. Forget about taxes
Many people think that their taxes will go down in retirement, or that they won’t need to pay the IRS at all. But this is far from true.
First of all, withdrawals from the pension plan count as taxable income if you don’t have a Roth savings plan. Additionally, Social Security benefits may be taxable, depending on your total income. And then there are the pension payments – if you’re lucky enough to be impatient with them, you should expect to pay taxes on them as well.
To avoid a financial crisis later in life, learn about taxes in retirement and work with an accountant or financial advisor to see what strategies you can use to minimize the burden on your IRS. You may want to transfer some of your savings from a traditional retirement plan to a Roth account, for example, to put yourself in a lower tax bracket as a senior.
While planning ahead for retirement is a smart move, falling victim to these mistakes could really set you back. Now that you know what mistakes to avoid, you can continue to focus on saving and investing so you’re ready for your retirement years.