Common regrets when it comes to saving for retirement
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Saving for retirement isn’t always an easy task, especially when you don’t know where, when or how to start. Often, it is only after retirees have left the workforce and have finally spent their savings that they realize that they could have done certain things differently.
The hindsight is 20/20 and while you can’t go back, you can avoid making some common mistakes that lead to regret when it comes to saving for retirement. Below, Select has rounded up some of the biggest things retirees wish they could do differently.
1. Not saving enough money
Not saving enough money for retirement often goes hand in hand with not starting your savings earlier. According to Charles Scwhab, the later you start saving for retirement, the more you will need to set aside each month to support yourself after retirement – if you start saving in your 20s, you will set aside 10-15%. of your income, but if you are starting in your 40s, you may need to save up to 35% of your income.
Plus, when you start earlier, your money has even more time to accumulate, which means you’ll end up with a bigger balance by the time you’re ready to retire. Starting with something, no matter how small, is better than not starting at all.
“The most common regret I hear is that people think they haven’t saved enough and wish they had started saving sooner,” said Julia Pham, Certified Financial Planner at Halbert Hargrove. “Younger customers often make this mistake. You should save 10-15% of your pre-tax income. Sounds like a lot, but it’s okay not to hit that 10% right away. because saving for retirement is a necessity. “
2. Do not pay catch-up contributions
A catch-up contribution is a provision that allows people aged 50 and over to put additional money into their retirement account each year to “catch up” with their savings. The standard contribution limit for a 401 (k) in 2021 is $ 19,500, while the catch-up clause allows an additional savings of $ 6,500 for those 50 and over, for a total contribution of $ 25,000. For a Roth IRA, the standard contribution limit is $ 6,000, but the catch-up limit is $ 7,000.
Catch-up contributions are particularly useful for those who did not save enough for their retirement when they were younger. Yet few older people take advantage of this provision.
According to Pham, a Vanguard study found that 15% of people eligible to make remedial contributions actually do so. This is basically the money that is left on the table because more contributions allow your balance to accumulate and grow faster, and it reduces your taxable income when you contribute to a 401k or traditional IRA.
Even if you may not be able to pay the full catch-up amount, saving some money now may mean more money in the future. You can also reduce the pressure of balancing catch-up contributions with your daily expenses when you’re older by starting early and maximizing your retirement savings when you can.
3. Do not diversify your method to save money
There are different ways to save for retirement. Most people are enrolled in a traditional 401 (k) plan through their employer, where they contribute a percentage of their paychecks before taxes are withheld. With a 401k, you will only pay taxes on withdrawals made at retirement. A Roth IRA, on the other hand, allows you to make after-tax contributions to an account so that you don’t pay tax on withdrawals made at retirement. The difference in tax obligations really sets these two savings vehicles apart.
And while it’s better to have one than not at all, it’s better to diversify where you’re saving and avoid putting all of your money in one basket.
“I see retirees regretting that they only paid their contributions into pre-tax savings accounts,” Pham said. “It’s good to diversify and contribute to pre- and after-tax savings accounts, because if you only withdraw from a pre-tax account – like a 401 (k) or traditional IRA – you’re going to pay taxes on it. Income . Sometimes it’s not ideal to pay tax when you have a big or unexpected expense in retirement. ”
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4. Retire as soon as possible
About 51% of Americans retire between the ages of 61 and 65, however, the average retirement age can vary from state to state due to different factors such as the cost of living in those regions. While a few years don’t seem to make a difference, Pham says those few years can provide a bit of extra financial security – and it can help keep you from running out of money and having to get out of retirement.
“I certainly see more people regretting that they retired sooner rather than later, because once you leave the workforce it is much more difficult to re-enter and find something that is comparable to what you are. were doing before, ”she said. “I have clients who think they should have waited a few more years for that extra financial security. Waiting a few more years only strengthens your financial stability.”
When it comes to determining when you should retire, it helps to have an idea of your retirement needs. This way you can figure out how much it will cost you each year to maintain your lifestyle and take the necessary steps, i.e. stay in the workforce a little longer, before you retire. Only 19% of workers have a written strategy to enable them to retire.
Of course, sometimes things don’t always go as planned. Almost half of older workers say they’ve been forced into early retirement, according to AARP, which can certainly hurt your savings strategy, especially if you were counting on five to ten extra years of work to fund your retirement. . One of the most important ways to make sure that the progress of your savings doesn’t totally derail if something like this happens to you is to start saving as early as possible so that your money has more time to accumulate. and bear fruit.
5. Not having a plan for what they want to do in retirement
According to Pham, some retirees are leaving the workforce but just find themselves sitting on their hands because they haven’t made plans on how they want to spend their golden years in a fulfilling way. But there’s another equally important reason why you should have a plan for what you want to do in retirement.
The lifestyle you want to lead will help you determine how much money you must have saved to finance this life. A 31-year-old Select who was spoken to, for example, hoped to travel the world in retirement, but found he wouldn’t have enough money to do so since he started to save later in life.
If your dream retirement is to move to a neighborhood with a lower cost of living and participate in minimal activity, you will need less money to survive compared to someone who wants to travel or spend. more for experiments.
Take the time to think about what is important to you and how you see these things fit into your life when you are retired.
At the end of the line
While it may seem like there is so much to consider when it comes to saving for retirement, one resounding advice that stands the test of time is to start as soon as possible, even if you don’t put hundreds of dollars aside every month. .
Take advantage of your employer sponsored 401 (k) plan since a percentage of your salary is automatically paid to you and open a Roth IRA to diversify your savings methods. And, of course, make sure you have an idea of what you would like to do in retirement. This can help you determine how much you really need to save for your golden years.
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