It’s hard to imagine that the decisions you make now will have a long-lasting impact on the future of your life. Nevertheless, they do, especially when it comes to retirement planning. As one of the most important financial goals of your life, every choice you make—or don’t make—regarding your retirement will determine your ability for financial freedom down the line. While this may seem daunting, RPCSI has outlined 10 retirement planning mistakes to avoid so you can secure your future financial independence.
1. Not Having a Retirement Plan
Without a plan in place, you’ve basically sabotaged your retirement from the very start. The purpose of a retirement plan is to help you determine how much money you’ll need as well as what steps you need to take to reach your final financial goals. Those who forgo a retirement plan often find themselves either not having enough money when they want to retire or running out of it too soon. You can avoid this issue by creating a plan that factors in your retirement age, location, desired lifestyle, and general health.
2. Putting Off Saving for Retirement
Many people—especially those further away from retirement—make the mistake of waiting until later to invest in their future. The sooner you start saving, the longer you’ll have for your investments to gain interest and grow. Thus, most experts recommend saving at least 10% to 15% of your total income to ensure you can live comfortably after leaving the workforce.
3. Making Poor Investment Decisions
Knowing how to build an investment portfolio can be a huge learning curve for people who aren’t familiar with the process. Because of this, many people misstep by blindly investing everything in unprofitable and risky investments. A financial advisor can help you circumnavigate this error by offering their expert advice on what investments would best work for you. RPCSI has built strong alliances and relationships with selected financial advisors and investment companies to ensure our clients have a reliable, resourceful network.
4. Leaving the Market in a Downturn
A common kneejerk reaction people make during a period of market decline is to pull out all their stocks. However, this panic only results in losing the money they could have gained once the market returns. Making the right decision will require patience and resolve but remember you can always rely on a trusted financial advisor to help you if you’re uncertain about keeping your assets in the market.
5. Missing Out on Employee Contribution Matching
Not taking advantage of employer matching contributions is like leaving free money on the table. This is especially true if your employer is matching your contributions dollar for dollar. The IRS limits continue to increase each year contribution limits in 2023. For a 401(k) plan, the contribution limit has increased from $20,500 to $22,500. Those age 50 and older making catch-up contributions can contribute an additional $7,500.
6. Cashing out Your Retirement Savings
A frequent error that happens among participants—especially those switching jobs—is that they cash out their retirement funds before the age of 59 ½. This is a problem because this early withdrawal results in the IRS accessing a 10% penalty on top of the regular taxes you will owe on the tax deferred portion of your account. Avoid this issue by being patient and allowing your savings to accumulate. If you want to withdrawal your funds from your prior employers’ plan, be sure to roll the balance to an IRA or to your new employer’s plan to preserve the funds for retirement and avoid paying current taxes and penalties.
7. Not Preparing for Unexpected Early Retirement
We don’t always know what to expect in life. Situations can arise such as health issues involving you or a family member or losing your job in a time when finding employment again Is difficult. These situations and more can result in retiring earlier than expected; therefore, it’s important to have an emergency reserve of cash.
8. Cashing Out Too Soon on Social Security
Patience has been a key aspect for correcting a few mistakes on this list already. This is also true when it comes to collecting your retirement benefits from Social Security. You may be tempted to start collecting at age 62, but if you hold off, the government issues 8% more for every year you wait until the age of 70, thus maximizing your benefits.
9. Overlooking Tax Implications
It’s essential during retirement planning that you consider tax implications so you understand what will work best for you before and after retirement. Think about what tax bracket you will fall into after retirement. If it’s on the higher end, you may want to pay taxes on the front end so your withdrawals will be tax-free. If it’s on the lower end, paying taxes when you withdraw may be the better option.
10. Underestimating the Length and Cost of Retirement
Retirement is often longer than people realize; therefore, people often make the mistake of not saving up enough money to last throughout their retirement. It's also common to forget that inflation and health care costs increase as you get older will most likely rise, depleting your savings faster than expected. Thus, many advisors recommend retiring with 80% of your pre-retirement income to last you 25 to 30 years.
Avoiding Mistakes Today for a Better Retirement Tomorrow
There are many dos and don’ts when it comes to retirement planning. By avoiding these 10 retirement planning mistakes, you can empower yourself to make sound decisions moving forward. More importantly, thanks to the smart choices you make, you’ll be able to retire comfortably with financial security that will last you the rest of your life.