Transitioning into retirement is a major shift. It’s not easy to spend the major part of life earning and saving, then shifting to living off those savings.
This new phase of life can last for decades, which is why it’s critical to think about your future needs so you don’t run out of money midway.
Avoid these seven common retirement planning mistakes to increase your odds of a smooth and comfortable transition.
1. Stopping at your employer’s retirement plan
Your workplace retirement account and its benefits — such as an employer match — are a great place to start saving for retirement. But don’t stop there.
Consider an individual retirement account (IRA) or even a taxable brokerage account that gives you more flexibility and more investing options — and maybe better returns than you’d get from the menu of offerings in your employer plan.
Also consider the tax details of those additional accounts to see what may be better for you. Do you anticipate being in a lower tax bracket when you stop working? Maybe you should consider a regular retirement account. Concerned about post-retirement taxes? You might want to contribute to a Roth IRA.
Better yet, maybe you should do a bit of both.
2. Only putting funds in tax-advantaged accounts
Tax-advantaged accounts can get you a nice tax break, but also come with lots of rules. For example, in most cases, you’ll pay significant penalties for withdrawing money early from most tax-deferred accounts, as well as income taxes on the withdrawals.
That’s not a big deal when you’re on the younger side and your long-term emergency fund is robust. But it can leave you in a bind if a tax-advantaged account is all you’ve invested in, particularly if you’re nearing retirement and something unexpected comes up.
As you age and head toward retirement, it may be better to divert some of your retirement savings to nontax-advantaged accounts, like Roth IRAs or 401(k)s. That way you can withdraw money without penalty, and since you’re funding them with after-tax money, withdrawals are also tax-free.
3. Overlooking professional help
A qualified financial adviser can make a world of difference when it comes to wealth management and growth.
A <a href=”https://advisors.vanguard.com/content/dam/fas/pdfs/IARCQAA.pdf“>Vanguard study</a> found that, on average, a hypothetical $500,000 investment over 25 years would grow to $1.7 million if you manage it yourself, but more than $3.4 million if you work with a financial advisor. That’s twice as much!
If you’ve got at least $100,000 in investments, check out a free service called SmartAsset. You fill out a short questionnaire and instantly get matched with up to three vetted financial advisors in your area, <em>all legally bound to work in your best interests</em>.
Even if you don’t want help picking investments, an advisor can help lower your tax burden, create a comprehensive financial plan, maximize your Social Security, help with estate planning and making sure you’re on the right track. They can also be there in case one day, you’re not.
Using SmartAsset only takes a few minutes, and in many cases you’ll be offered a free consultation.
4. Focusing on one goal at a time
It can be overwhelming to juggle responsibilities like an emergency fund, a family and everything else life throws at you, as well as building wealth to fund the retirement lifestyle you want.
Experts recommend, however, that you should always be balancing multiple financial goals, including building savings in both liquid and investment accounts.
That can prevent trouble down the road, should there be an unexpected expense and all of your money is tied up in a long-term goal.
So make sure to budget for contributions to an emergency account in addition to your contributions to a retirement account.
5. Assuming your circumstances won’t change
Retirement planning is something you should do as early as possible. But recognize that it’s likely your financial priorities will shift multiple times before retirement, and your plan should shift with them.
You may end up buying multiple homes before retirement or getting married or divorced — or maybe you decide to take a lower-paying and less stressful position late in your career.
Whatever the specifics, understanding that your circumstances will change over the course of your working years means regularly reassessing your retirement savings and contributions.
6. Focusing only on your current expenses
While those bills you’re currently paying can give you a sense of your financial health, take a broader view.
Periodically compute your net worth by subtracting your what you owe from what you own, and keeping track of both your debt and savings.
By keeping tabs on the big picture, you’ll be better equipped to make financial decisions.
7. Living beyond your means
One of the best things you can do for your retirement savings is build strong financial habits when you’re young.
Living frugally now will support and contribute to your retirement account, and help you get you through the long haul — hopefully with few problems.
Keep track of both your income and expenses with a budgeting program and always be looking for ways to save a buck or two without sacrificing your quality of life.