Everyone makes mistakes. But avoiding the five biggest retirement mistakes or correcting them quickly can help put and keep you on track for an enjoyable life in retirement.
Many financial advisors have seen clients desperately knocking on their door because something went wrong with their financial planning. Maybe the client lost a lot of money in the market due to poor investment choices. Or they fear they may not have enough to retire comfortably.
We asked several financial advisors to provide tips on the biggest retirement mistakes to avoid:
Retirement Mistake 1. Not Starting Early Enough
It’s never too soon to consult with a financial advisor and get going on your retirement planning. The power of compounding works best when you have a lot of time. This means starting as early as possible, preferably in your twenties. For every year that you wait, you lose the opportunity to fill your account with money.
“The power of compounding is truly astonishing; even Einstein considered it the world’s eighth wonder,” said Marcel Winger, owner at Mutual Wealth. “You really have two options when it comes to retirement planning: 1. dedicate more of your cash flow towards retirement now (ultimately spending less cumulative dollars out of your own pocket). 2. delay your savings (ultimately spending more cumulative dollars out of your own pocket).”
Retirement Mistake 2. Overpaying For A Financial Advisor And Other Fees
Today, it’s easier for clients to find fee-only financial advisors that carry a high level of ethical as well as legal responsibility toward their clients’ investments. When looking and deciding on an advisor, pay attention to how they’re paid. Check to see if they’re fee-based and fee-only advisors. The former will get fees from clients but also commissions for products they sell to clients. The latter is the ideal choice for most people whereby they can be sure the advisor acts as a fiduciary and will not be making any other fees except those paid by the client.
“Most financial advisors are not fee-only,” said Michael Caligiuri, founder and CEO of Caligiuri Financial. “Which means that most financial advisors are not legally obligated to give people advice in their best interest.”
On the other hand, some investors with large accounts might prefer paying a commission or fee to an advisor when a stock is added to or sold from their account. That could be cheaper than paying a fee based on assets in the account. For those using fee-only advisors, look for break points as assets reach higher levels.
Mike Kurz, CEO at OverShare Advice and Planning, and executive coach for fee-only advisors at FeeOnlyCoach.com, says that advisors are the best positioned to talk about and be critical of fees and expenses. Yet they are the least likely to address this issue. “It is too rare for financial advisors to be critical on expenses/fees for their clients and to put each investment or fund under a magnifying glass to reduce or remove unnecessary fees. We define unnecessary fees/expenses as the kind that don’t add discernible value to a client’s financial plan,” he explained.
Retirement Mistake 3. Taking Distributions Too Soon
Penalties are imposed on investors who withdraw money from their retirement accounts before reaching 59-1/2 years old, with certain exceptions. For a 401(k) retirement plan, you’ll need to pay a 10% penalty plus income tax on the amount withdrawn too early. So investors should review the tax ramifications before doing so. This does not only cost you money, but also creates an opportunity cost due to missing out on the compounding of potential returns on investments.
If there’s a dire need to take money from a retirement account before full retirement, be sure to check for rules that cover instances when money can be taken without penalty. Some exemptions on the 10% penalty on some or all of your withdrawals include hardships like medical bills, buying a house and college tuition.
Withdrawing from your retirement the second you turn 59-½ is not necessarily advantageous either. In fact it’s often a retirement mistake.
“Many people often think they should start taking distributions from their 401(k), IRA, or other qualified accounts as soon as they walk out the door when retiring,” said Brett Fry, wealth advisor at Forteris Wealth Management. “Often times this is not the best strategy and can lead to excess taxes paid early on in retirement. More often than not clients are better off drawing on, and even depleting their taxable accounts before dipping into their retirement assets.”
This is also why you need to plan ahead of time with your advisor for the required minimum distributions that start at age 72. You will be able to “spread out the taxes over multiple years, lessening the sting of the tax bill and potentially growing a portion of the accounts tax-free through the use of a Roth conversion strategy,” said Winger.
Retirement Mistake 4. Spending Too Much
Buying a bigger house, a bigger car, the newest smartphone and keeping up with the Joneses — all part of lifestyle creep — combined could put a serious dent in the longevity of your retirement account.
“What is lifestyle creep? It’s the propensity of people to increase their spending as they earn higher wages over time. Everyone at some point or another falls victim to spending more of their earnings simply because they have more discretionary income,” explained Winger.
It’s therefore the job of the advisor to review whether their clients are living beyond their means.
Overspending during your working years “is a double whammy on retirement savings,” said Tara Unverzagt, founder of South Bay Financial Planners. “A) you don’t save as much because you’re spending more, and B) your lifestyle is more expensive and therefore you need to save more to retire.
“With high spending, you’ve wedged yourself into working longer. If you cut back, you can save more and need less, which gets you to retirement quicker,” she added.
Mistake 5. Relying Too Much On The Employer
Today, it’s nearly impossible to imagine retiring on just Social Security. Yet many people rely on just that when planning for retirement. And that’s a big retirement mistake.
Sure, it will help. But it usually falls short of what you’ll need once you’re out of a job. In addition, financial advisors urge people to take full advantage of any 401(k) employer match during their working years, as this is free money that will grow tax-free for a long time.
The same holds for the insurance coverage that employers provide.
“It’s a mistake to assume that one has enough life and disability insurance coverage offered through their employer,” said Caligiuri. “A lot of people will say that they have employer coverage with no regard to how much coverage they have and in what cases it would pay out. In almost all cases of people I meet with, they never have enough life and disability insurance. Rarely do people have individual coverage, and that coverage will stay with them regardless of who they work for.”
Author: Marie Beerens
Source: Investors: 5 Biggest Retirement Mistakes People Make