3 retirement planning mistakes

3 Dangerous Retirement Planning Mistakes

Even the most diligent savers can make mistakes when it comes to retirement planning. Unfortunately, these mistakes can lead to retirees running out of money far before they wanted (or expected) to. In fact, according to Marketwatch.com, running out of money is the #1 fear for today’s retirees.

If you are not working with a savvy retirement planner who has helped you to answer and plan for the 4 most important retirement questions, you are highly likely to make one or all of these three deadly retirement planning mistakes:

Deadly Mistake #1: Not Understanding the Impact Taxes Will Have On Your Retirement Savings

The majority of today’s retirees won’t be able to rely on a pension. Instead, the majority of their retirement income will have to come from their own personal savings into a qualified retirement plan such as a 401k, 403b, or IRA. Employees are encouraged to save into these plans while working, with the added benefit of being able to “save” on taxes. However, too many people don’t think about the fact that you aren’t really saving – you are actually deferring those taxes. Make no mistake, that bill will come due. And when it does, you may be in a higher or lower tax bracket than you are today.

Regardless of which bracket you are in, the income you take from these retirement plans will be taxed as ordinary income (the highest rate), and if you don’t account for this during your retirement planning (i.e. working) years, you could be in for a world of hurt. For example, if you are counting on living on that $1 Million that you plan to have saved in your IRA, you must remember that that million dollars is not all yours. $300,000 to $400,000 of it belongs to Uncle Sam – and he will be collecting!

Not to mention, in retirement you may not be eligible for many of the tax deductions that you enjoyed during your working years such as the mortgage interest deduction and child tax credits.

This means you should plan to save at least 30% more than what you will need to live on in retirement.

Deadly Mistake #2: Not Having Enough Tax-Free Income Sources

Besides saving more to counterbalance the impact of taxes, another thing you can do to improve your future retirement income picture is to incorporate more tax-free savings vehicles into your retirement portfolio.

Tax reform bills crop up every few years, but regardless of any new short-term tax cuts that may happen this year, the fact remains that when the government needs money, taxes tend to go up. And guess what a major source of government revenue will be as the Baby Boomer generation continues to retire over the next decade?

That’s right – tax-deferred retirement accounts.

This is why you may want to consider adjusting some of your retirement savings now if possible. Even if you have to pay the tax now, it may be worth it – especially if you are young and in a lower tax bracket than you will likely be when you retire. By repositioning some of your retirement savings into tax-free vehicles now, you will be able to enjoy a tax-free income stream from these sources during your retirement years – which also means you won’t have to save as much to enjoy the lifestyle you want in retirement.

Consult with a qualified retirement planning advisor to discuss tax-free retirement savings options that may be available to you.

Deadly Mistake #3: Having Too Much Investment Risk

Some people are perfectly comfortable with a certain amount of risk when it comes to their investments. But as you draw closer to retirement, that comfort level will likely change – or at least, it should. According to Kiplingers.com, if you are working with a financial advisor who has not discussed how investment risk can impact your retirement plan beyond the accumulation phase and into the distribution phase, you should definitely look for a second opinion.

Even a relatively small market correction can have a much more significant impact on your retirement savings during the distribution phase!  (Watch this video for more on this topic.)

If you are feeling uncomfortable at the thought of how a drop in the market could impact your retirement savings, it may be time to speak with a professional who specializes in retirement planning. Be sure to look for someone who understands your needs and who will spend plenty of time listening and educating you rather than just talking about products. You also want someone who is knowledgeable and experienced with many different types of retirement planning strategies – not just market-based investments.

Ready to start the conversation? Contact us today for a FREE initial strategy session. Our experienced retirement planning specialists can evaluate your current retirement plan and help you make any necessary adjustments to make sure it meets your needs, your risk tolerance, and your future tax-planning and income goals.

 

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