Saving for retirement is confusing. It’s no surprise that we make mistakes along the way. Fortunately, there are strategies to get back on track.
Here are the most common retirement mistakes shared by financial planners – and how to avoid them.
1. Failed to create a plan
A retirement plan is one of the best ways to spot potential barriers to long-term goals, says Nancy Skeans, CEO of Schneider Downs Wealth Management Advisors in Pittsburgh.
To create a financial plan for retirement means estimating future expenses and expected income.
Make sure you write it down. “A plan isn’t in your head, it’s on paper,” Skeans says.
2. Forget about taxes
If you’ve been saving for a while, you might get excited when you take a look at your balance. Remember that some of this money – assuming it’s in a 401 (k), traditional IRA, or similar tax-deferred account – will go to taxes.
You can’t avoid taxes, but you can diversify with after-tax accounts. For example, with a Roth IRA, you put in money after paying taxes. Then your money, including investment income, comes out tax-free in retirement.
Another idea is to save money in a taxable investment account. You may owe taxes each year on capital gains or dividends, but these rates are often lower than normal tax rates.
Having a Roth or taxable account in addition to tax-deferred accounts helps you manage your taxes in retirement. If distributions from a 401 (k) or traditional IRA push you into a higher tax bracket, you can use money from a Roth to keep your tax rate lower.
“We always want our customers to have as much flexibility as possible,” says Skeans.
3. Overpay fees
There are many retirement account fees to watch out for, including entry fees and expense ratios of mutual funds, trading commissions, and account maintenance fees. All of these erode returns on investment over time.
At a minimum, look for low or free trading commissions and invest in exchange traded funds or index mutual funds.
“These are very low costs,” says Lindsay Martinez, founder of Xennial Planning in Oceanside, California. “You don’t have to pay a charge for a mutual fund if you don’t want to. “
4. Tap into savings before retirement
Emergencies are coming, there’s no doubt about it. But sometimes people take money out of their retirement accounts when it’s not absolutely necessary.
This triggers taxes and a potential penalty of 10%. Depending on your tax bracket, “you could wipe out almost half of what you take out with taxes and penalties,” says Martinez.
Ideally, save separately for emergencies and save for your financial goals.
5. Take too much or too little investment risk
It can be difficult to get fair investment allocations. A good rule of thumb: If you have at least five years to put your money to rest, harness the long-term growth of the stock market to build your balance. You have time to overcome market volatility – your investments may lose value when a downturn occurs, but they will rise as the market recovers.
“You can take a little more risk,” says Shaun Melby, founder of Melby Wealth Management in Nashville, Tennessee.
The reverse is true for people who will need their money in less than five years. Investing too aggressively in stocks could be a problem as you may have to sell investments that have lost value. An easy way to properly allocate your assets is to invest with a robotic advisor. Robot advisers use computer algorithms to build and manage an investment portfolio for you, which can ensure that you are taking the right level of risk at the right time.
6. Not saving enough
Sometimes not saving enough is not so much a mistake as it is a lack of resources. But no matter how the problem came about, there are ways to fix it.
If you’re older and retirement is just around the corner, working longer may be your best bet.
That doesn’t necessarily mean more years at a job you hate, says Ashley Coake, founder of Cultivate Financial Planning in Radford, Virginia. A lower paying part-time job might be enough to help you until you fully retire.
Keep in mind, however, that it is not always possible to work longer. Life, in the form of a health crisis or job loss, can derail this plan.
Another strategy that works at any age? Reduce expenses. “Cutting spending is a tough thing to do, but it’s a great way to have a huge impact” on retirement savings, says Coake.
7. Work longer than necessary
People in their sixties and sixties often come to Coake, saying they are tired of working and wondering when they can retire.
“Honestly, this happens a lot,” Coake says. “And I have to say,” You could have retired three years ago. “”
It’s not that surprising, says Coake. It is complicated to determine how various investment and retirement accounts will generate income and how these accounts interact with Social Security.
“It’s just a really hard picture to put in your head,” Coake says.
This is where a written retirement plan comes in handy. The external point of view of a Financial Advisor can also be useful, especially if your financial life gets complicated over time.