You could spend 30 years or more saving for retirement. Getting it right can mean the difference between fighting or living comfortably after you stop working.
As your life changes and your goals change, your retirement journey may not follow a completely straight path. But no matter how much the road goes around and around, avoiding these five mistakes can help you reach that monumental goal faster.
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1. Not contributing as much as you can to your 401 (k)
Reaching the maximum 401 (k) contribution limit each year – which is $ 19,500 for 2021 if you are under 50 and $ 26,000 if you are 50 or over – may not be possible. But contributing everything you can can still benefit you.
Among these advantages are an increase in their deferred tax contributions. You will also receive a reduction in your taxable income for any contributions you make to a traditional 401 (k). Therefore, if you earn $ 60,000 and can add $ 10,000 to that account, your taxable income will be reduced to $ 50,000 for that year. With this type of account, you will end up owing taxes on your withdrawals in retirement, but at that time, you may be in a lower tax range than when you were working.
Another benefit of a 401 (k) is any correspondence by your employer. A corresponding company will contribute an amount based on its own contributions, up to a certain percentage of its salary. For example, if your company matches your dollar-to-dollar contributions to 5% of your revenue and you earn $ 50,000, you can receive up to $ 2,500 in free money through a combination. Making sure you contribute at least enough to get your full employer correspondence can help you achieve your goals more quickly.
2. Not planning how much you will need in retirement
Everyone needs a different amount of money in retirement. Finding out how much you will need involves evaluating what your future will be like. Will you receive Social Security benefits and a pension after retiring or just Social Security? Will your expenses be the same as now or will you work to reduce them before retirement?
The more sources of income you have and the less expenses, the less you will need to save. You should also consider the return you are getting on your investments and how long you have to retire.
You can just put money in a 401 (k) and hope for the best. But using a calculator to come up with a retirement number unique to you will make you better prepared and less stressed.
3. Not investing your money properly
If you add money to your 401 (k) or IRA and never invest it, it will be in cash and not earn much. In that case, you will get the tax savings that these accounts can offer, but not the deferred tax growth.
Investing your retirement savings in stocks and bonds can also help you grow faster. If you contribute $ 6,000 to an IRA each year for 20 years and it earns 9% on average, it can grow to almost $ 264,000. In 30 years, it could reach $ 609,000. But if you contributed without investing anything, you would only have $ 120,000 after 20 years and $ 180,000 after 30 years, assuming you don’t receive interest.
Between 1926 and 2019, having a portfolio consisting of 60% shares and 40% bonds would have yielded an average rate of return of 9%. It is important that you remember that the rate of return you receive depends a lot on the market cycle in which you have invested. For example, if you maintained a much more aggressive portfolio of 100% large-cap stocks between the beginning of 1991 and the beginning of 2021, you would have obtained only an average annual return of 8.5%.
4. Diving into your retirement savings
You can borrow up to 50% of your 401 (k) balance up to a maximum of $ 50,000. There are also some exemptions from difficulties, such as paying medical expenses, that allow you to withdraw money from your account. With a loan, you will be responsible for paying the money back. If you don’t, you may owe fines and taxes. With difficulties, you do not need to return the money, but you owe taxes on the withdrawal – and your account balance will be permanently reduced by the amount you withdraw.
Increasing your accounts is more difficult if you take money from them periodically. There may be times when you absolutely cannot avoid diving into your savings for retirement, but you should limit them as much as possible. Instead, when an emergency arises, try to find other ways to deal with it.
5. Not planning for inflation
You can look at your retirement savings balance and be scammed into thinking that it is enough. While it may be enough if you retire today, you should consider that your purchasing power will decrease over time, as inflation increases the costs of goods and services.
The average long-term annual inflation rate between 1913 and 2019 is 3.1%. This means that you will need $ 1,250,000 in 30 years’ time to match the purchasing power of $ 500,000 today. Including this crucial factor in your retirement projections can help ensure that you will not survive your savings.
You plan for retirement so you can enjoy it, but finally getting there and finding out you don’t have enough can be devastating. Avoiding the mistakes listed above starting now will help you make the most of your savings and avoid this outcome.