Avoid These 10 Retirement Planning Mistakes
Thinking about retirement and how you will fund your desired retirement lifestyle is something that should be considered when young, and particularly when starting or growing a business. This planning should be high on your list of priorities for a number of reasons. Do not make these mistakes:
- Having no retirement plan at all.
About the biggest mistake you can make regarding retirement planning is having no retirement plan at all. Just considering Social Security as your funding mechanism is a huge mistake. You should start young, and when you start a business, to plan for retirement. You will consider things like the cost of your desired lifestyle, how much you can realistically save in current years, and how you can grow that amount with business success.
The small business offers ways to use IRS Qualified retirement plans to not only grow your retirement savings tax free, but also to fund the account with pre-tax dollars if deductions are important early in your business. If not, using a different type of retirement account funded with post-tax dollars can have you withdrawing tax free in retirement.
- Not increasing contributions as your business grows.
You would not ignore growth plans for your business and profits, so do not ignore how this can change and enhance your savings for retirement. Choosing plans with flexibility in contribution arrangements can provide some growth planning but consider how more than one plan may be put into play that will allow increased contributions when business is producing increasing profits.
- Not knowing how much you will need to fund retirement.
This goes with the first item in this list, in that you must begin planning now. The only way to know what you will need is to anticipate the lifestyle you will want and then work the numbers to see how much money will be necessary to fund it. There are online resources for calculating compounding of interest and the future value of current funds. It is crucial to maintain a realistic attitude about expected ROI, return on investment, for your retirement assets to avoid falling short when it is too late to fix the problem.
- Paying high investment and management fees.
It is easy to look at prospectus documents and see acceptable or even excellent returns but not really pay attention to fees involved. Many 401(k) and other retirement accounts charge fees that mount up fast. If your taxable earnings are between $30,000 and $80,000, and if you are young, it is easy to find that even a 1% management fee can cost you a significant six-figure cost over decades. That is money you would much rather have earning interest in retirement.
- Relying solely on Social Security.
Even if you are pulling down a high salary from your business and seeing some hefty money paid into Social Security, it is risky to rely upon the government to live up to current promises. Things and taxes change over time. While there is a tiered structure for paying taxes on Social Security benefits currently, the taxation levels can change at the whims of government.
- Assuming you will want to keep working during retirement.
Sure, you may be certain that you would be bored not doing something in retirement, it may end up not being an income-generating something. You may do volunteer work. Or, you may have health issues later that will keep you from doing work that you planned for extra income. Assume no other income as the safe approach, and then any you do make will be extra for fun.
- Assuming you will never work during your retirement.
On the other side of the work-in-retirement coin is assuming you will not work during retirement. You may discover new opportunities in retirement that draw you back into business or working. The reason to consider this a possibility is in planning your future tax rates in retirement. When making current decisions about qualified retirement accounts and whether to choose pre-tax or post-tax contributions can hinge upon future income expectations during retirement.
- Borrowing from your retirement account.
It can be tempting to borrow from your retirement account if allowed by the IRS. This is especially true if you have an opportunity to grow your business and need some capital. It is almost always a better approach to seek out other funding. The compound interest alone that you would lose while the money is out of the account could be significant.
- Starting retirement planning too late.
There is no other way to say it than start retirement planning right now, no matter what your age, the status of your business, or your personal finances. Retirement accounts can grow to huge balances, but only if they are accruing interest for many years. Losing years on the front end will cost you many times over.
- Forgetting to factor in future medical expenses.
Whatever your insurance or Medicare expectations, you will have medical expenses as you age. Many couples who thought they had a comfortable retirement funded have had to go to work or take other action to increase their income due to medical expenses. Factor them in early.
These are the top 10 retirement planning recommendations, and there are other reasons for getting into retirement planning as early as possible. Look into them right away.