NOT HAVING A PLAN & NOT OBTAINING ADVICE FROM A PROFESSIONAL
Making contributions is great, but to what end if you don’t have an actual retirement plan? A retirement plan is all-encompassing if done properly. Certified financial planners link all areas of your financial life together through strategic planning and industry/market knowledge. A sound retirement plan is like a car. There are many key parts that work together to make the car run. If one of the parts is not working properly, it can impact the other parts and, ultimately, stop the car from working.
Retirement plans are comprised of many parts too:
- social security
- other retirement accounts
- estate planning
- insurance planning
- risk tolerance
- living expenses
- life expectancy
- and more
Oftentimes decisions made in one area directly impacts another. Having a strong background in financial planning and investing is paramount when trying to properly connect all these parts in the most efficient and beneficial manner.
Financial planners can also provide guidance on what-if scenarios and contingencies. It goes beyond “How much money will I need in retirement”. Perhaps, you want to know how much longer you would have to work to buy a second home at the beach. Or maybe you or your spouse become unemployed a few years prior to retirement. How does this affect your current retirement plan? Should you stay in your current home or downsize? Should you take distributions now to cover unexpected costs? What will the tax consequences be? Financial professionals can help you answer questions like these and many more.
STARTING TOO LATE
Timing truly is everything. This is thanks to compounding. Compounding is when an investment earns a return, and the gains on the initial investment are reinvested and begin to earn their own returns. Two individuals could put the same amount into their retirement accounts for the same number of years, but the individual who started at an earlier age will end up having more by retirement. Here is an example taken from an earlier blog post we wrote about the power of automatic contributions:
- John puts $1,000 per month away starting at age 25 and then stops contributing after 10 years. The money just sits in his investment account accruing at a 7 percent rate until age 65. John will have about $1,500,000 at age 65.
- Cindy puts $1,000 per month away starting at age 45 and then stops contributing after 10 years. She too, just lets the money sit in her investment account accruing at a 7 percent rate until age 65. Cindy will have about $375,000 at age 65.
A total of $120,000 was contributed by both and for only 10 years. However, John’s account grew by $1,125,000 more than Cindy’s. That is compounding at work! So, even if you can’t contribute a large amount now, contribute what you can and then increase those contributions every year or whenever possible.
NOT TAKING ADVANTAGE OF EMPLOYER MATCHING AND NOT ALLOCATING ENOUGH TOWARD CONTRIBUTIONS
For most employer-sponsored plans, you can contribute as much as $19,000 per year or $25,000 if you are age 50 or older. Traditional and Roth IRA plans have a maximum contribution limit of $6,000 per year or $7,000 if you are age 50 or older. Most people are not able to max out their retirement contributions. However, you should, at the very least, contribute enough to take advantage of any employer matching opportunity.
The average company match is 4.7 percent, according to Fidelity (which manages around 30 percent of the assets of all employer-sponsored 401(k) plans). That means that many companies will contribute up to 4.7 percent of an employee’s salary into their retirement account, provided they put in at least that amount themselves. For example, if your employer matches 100 percent of your contribution, up to 5 percent of your salary, then you should contribute at least 5 percent. This will make your total contribution rate 10 percent. Say you make a salary of $60,000 in the above scenario. Your contribution would be $3,000 from your annual salary. With an employer match of 5 percent, your contribution is doubled. You would be losing that $3,000 of free money every year if you didn’t contribute enough to take advantage of the employer match.
BEING TOO CONSERVATIVE IN YOUR INVESTING APPROACH
Many people are afraid of risk. While this won’t prove to be too debilitating regarding short-term goals such as building emergency funds or saving for a dream vacation, it can be catastrophic if applied to long-term retirement planning. The S&P 500 has reported the average rate of return on stocks going all the way back to 1926 has been 10 percent. There is a myriad of options available to investors ranging from conservative to aggressive. Working with a registered investment advisor can help you navigate your options and select the most appropriate mix for you based on your risk tolerance and retirement goals. As you get older, allocations will be adjusted and some of the investment vehicles used may even change. As you grow and change, so too should your investment portfolio.
SPENDING INSTEAD OF SAVING
We live in a world where instant gratification is the norm. Whether it keeping up with neighbors or credit card mania or simply not being able to delay having the latest and greatest, you must learn to temper that impulse for the sake of your retirement future. Learn to live below your means, rather than beyond. Buy a used car, thrift shop, look for deals, cook instead of dining out, limit yourself to one “want purchase” a month. Be frugal, not frivolous.
Avoid debt. Don’t pay for today’s expenses with tomorrow’s income. According to Value Penguin, the average American household debt is $5,700. The average for balance-carrying households is $9,333. With interest rates being anywhere from 10 percent to upwards of 20 percent, it is easy to see how you can dig yourself in a hole quickly.
OVERSHOOTING YOUR SOCIAL SECURITY BENEFITS
For many Americans, Social Security benefits are the bulk of their retirement income, especially for the 39 percent of workers who say they have no money saved for retirement, according to the Social Security Administration. How much you receive is dependent upon your income in your 35 highest earnings years as well as the age you retire. You can create a my Social Security account and use their estimates as a starting point. You can also use the Social Security Retirement Estimator for an estimate of what you can expect. Knowing when to claim to achieve maximum benefits is crucial.
PROVIDING FINANCIAL SUPPORT TO FAMILY
We all want to help our loved ones in times of need. However, doing so on a long-term basis can wreak havoc on your retirement savings. According to Bankrate.com, half of the American parents have cut back on their retirement savings to help pay their children’s bills. Seventeen percent of the more than 2,500 adults surveyed by Bankrate claim they sacrificed their own retirement savings by “a lot” to help their adult children. Another 34 percent said they’d sacrificed their savings plans “somewhat.” If you choose to take this money from your IRA or 401(k), it will increase your taxable income. If you are younger than age 59 ½ and try to take the money from your retirement account, you will face a 10 percent early withdrawal penalty as well as any income tax if the money came from a tax-deferred account. While extending this support is well-intentioned, it can have negative consequences.
BEING BLIND TO FEES
Retirement accounts charge fees, which often come out of your account automatically. The amount depends on what investments you have and the type of account. Administrative fees, expense ratios associated with mutual funds, and exchange-traded funds (ETFs) and the fee you pay to your financial advisor to manage your investments. Reading the prospectus of the funds you are invested in, reviewing your statements, and keeping the lines of communication open with your financial advisor will help you stay on top of fees and ensure you are invested in lower-cost investment products.
WITHDRAWING MONEY EARLY
As we mentioned earlier, withdrawing money from retirement accounts prior to age 59 ½ comes with dire consequences. There are some exceptions: first time home purchase, qualifying education expenses, or to cover medical expenses that exceed 10 percent of your adjusted gross income. Some 401(k) plans allow loans that must be paid back within a set time frame. However, every dollar you take today is less money you’ll have in retirement.
Instead, set up an emergency fund that can use to cover unexpected expenses or large purchases. Having three to six months of living expenses saved up is a good rule of thumb.
You work most of your life to enjoy your retirement. Don’t let these 9 traps get in the way of your golden years. Call us at (410) 824-1853 to start a conversation or visit us at www.geierfinancial.com.
Sources: Motley Fool/ Forbes/ MarketWatch/ Money.com/ CBS News/ SSA.gov/
© Geier Asset Management, Inc. September 2019. Gregory Palacorolla, CFP ® is Director of Wealth Management for Geier Asset Management, Inc., a Registered Investment Advisor. The articles & opinions expressed in this material were gathered from a variety of sources, but are reviewed by Geier Asset Management, Inc. prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. The views expressed are those of the firm as of September 2019 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice. Any advice given is general in nature and investors must consider their own individual circumstances. In all cases, please contact your investment professional before making any investment choices. Geier Asset Management, Inc. is not responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.