3 Savings Mistakes That Could Sink Your Retirement
Ready to get serious about saving for retirement? That could be a smart idea. According to a recent study from Gallup, many Americans are worried about their preparedness for retirement. The study found that 54 percent of respondents are concerned that they won’t have enough money to fund their retirement.1
There may be good reason for concern. A study from the Economic Policy Institute found that the average American adult has less than $100,000 saved for retirement.2 That may seem like a lot of money at first glance, but it’s unlikely to fund more than a few years of spending for many retirees.
The good news is there are steps you can take to boost your savings and eliminate your concern about your preparedness. Below are three savings mistakes that people often make. Do any of these sound familiar? If so, it may be time to reassess your plan and make changes to your strategy.
1.) Putting all of your retirement savings in tax-deferred accounts
Qualified accounts such as IRAs and 401(k) plans are popular retirement savings vehicles, primarily because of their perceived tax advantages. These accounts allow you to make pretax contributions and then avoid tax exposure on all growth inside the account. That tax deferral could help you grow your funds more than you would in a similar taxable account.
However, the trade-off is that you WILL have to pay taxes on this money some day, and if your accounts grow as you hope they will, you will end up paying taxes on a much larger amount – which certainly makes Uncle Sam happy, but what about you?
Think of it this way: Would you rather pay taxes on the seed, or the harvest?
If you expect to have a lower income and be in a lower tax bracket when you retire, then storing your money in these types of accounts makes sense. If you’re not sure, then having some of your retirement savings in post-tax accounts (such as a Roth IRA or properly structured whole life insurance policy) – where you have already paid taxes on the money and you can take a tax-free income in retirement – is a good idea.
For most people, the wisest thing to do is to diversify your retirement savings to include both tax-deferred and post-tax savings strategies. This way, you won’t have to pay taxes on all of your retirement income, which can be a great advantage to those who expect to have a high income in retirement.
2.) Not following a diversified strategy
Diversification is at the core of any investment plan. Diversification is the idea that you should spread your assets across many different asset classes. That way, you aren’t exposed to excessive risk in any one type of investment.
Your specific allocation should be based on your unique needs, goals and risk tolerance. Those who are risk-averse or approaching retirement may choose an allocation weighted toward more conservative assets, and savings strategies geared towards protection with more moderate growth. Those who have more time or can tolerate more risk may choose to be more aggressive.
Unfortunately, many people get caught up in the latest news or trends. They may overweight their investments toward assets that have performed well in recent years. The problem with that approach is that it also exposes those individuals to excessive risk. A diversified allocation aligned with your goals can help you manage your risk exposure and make sure that your retirement savings are there for you when you need them.
3.) Focusing on short-term volatility instead of long-term objectives
Another common mistake many people make is maintaining a short-term focus when they have a long-term goal. It’s not easy to watch your assets decline in value during a market downturn. However, market downturns are often temporary. If you make a rash decision and abandon your long-term strategy, you could feel the impact of the downturn more than is necessary.
It is helpful to maintain a long-term outlook, especially if you have many years until retirement. However, if you’re approaching retirement, it may make more sense to consider short-term volatility as part of your planning, and make sure you have your assets properly diversified for protection as mentioned above. Either way, a financial professional can help you focus on what’s most important and make sound long-term decisions.
Ready to implement your retirement savings plan? Let’s talk about it! Contact us today for a free retirement strategy session. We can help you analyze your needs and develop a plan to suit your specific goals and objectives.
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