The process of retirement isn’t simply about turning 65 and handing in your notice. Preparing for retirement is a decades-long process that involves lots of careful planning, prognosticating, and preparation. For starters, it requires years of saving, investing, and strategizing. Even if you make no mistakes, it’s still a process that can get turned on its ear due to forces outside your control that can make saving and investing challenging, such as inflation or economic downturns.
For this reason, you want to avoid making errors that can make the process even harder. Following is a list of common mistakes people make when engaging in retirement savings and investing, with information about how to avoid these pitfalls.
Waiting too long to begin. Many younger workers find their earnings are under pressure for the here and now. Yes, it’s important to have a reliable home, a vehicle, and a bit of fun. But waiting too long to begin investing can rob you of the best possible retirement foundation. This is money that could be working for you by earning strong, compounded returns. Even if you’re young, you should be engaged with putting money into a solid 401(k) or individual retirement account (IRA) now, or you’ll find yourself having to play an uncomfortable amount of catch-up later on.
Not embracing the tax breaks. Employer-sponsored 401(k) plans and individual IRA accounts are tax-deferred, meaning that you can deduct your contributions from your taxable income and don’t have to pay taxes on your money as it grows. You’ll pay taxes at the time you withdraw the money, but chances are you’ll be in a lower tax bracket by the time you retire.
Not taking matching funds. If your employer matches your contributions to your 401(k), you’re leaving money on the table if you don’t take advantage of it as early as possible. These contributions by your employer will make your money grow faster, and sooner, giving you an excellent head-start on your retirement savings. Additionally, many of these plans require you to remain an employee for a certain number of years before you’re vested. If you’re considering leaving a job, weigh this factor before you submit your letter of resignation. It might be worth it to stick it out for a few more years until you are vested.
Tapping funds too early. If you’re in a tight financial spot or wish to make a large purchase like a home, it could be tempting to raid your retirement funds before you’re eligible, which will leave you with a huge tax liability and will slow the growth of your retirement nest egg. Avoid raiding retirement funds by looking into alternative sources of income, such a loan.
Not becoming financially savvy. Are you a good financial planner now? If not, you may be in for a rough ride when it comes time to retire. Learn as much as you can about managing your finances, so you have the skills necessary to manage your funds when it’s time to retire. It’s a good idea to tap a professional financial planner who can help you learn about your options and match a retirement savings strategy to your life and your goals.
Arizona-based Prime Wealth Advisors is a full-service tax, retirement planning, estate, and wealth management firm that can take the guesswork out of filing your taxes. Call 623.77.PRIME or visit our website for more information.