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Financial Watch | March 2021

Financial Watch | March 2021

March 16, 2021
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How Will You Avoid These 5 Common Retirement Planning Pitfalls?

Understanding the different steps you can take now to drive the retirement outcome you desire is an important part of planning for a confident future. However, it’s also important to understand what can throw you off course. Below are four common pitfalls to avoid along the path to saving for the retirement you envision.

1. Waiting to begin saving.

The earlier you start saving, the greater the potential benefits, thanks to the power of compounding. Compounding is the process in which investment earnings, from either capital gains or interest, are reinvested to generate additional account earnings over time. Your money has the potential to grow even faster when invested in a qualified retirement plan, such as a 401(k), 403(b) plan or individual retirement account (IRA). This is due, in part, to tax-deferred compounding, where earnings are not subject to taxes until they’re withdrawn, usually in retirement when you may be in a lower tax bracket. You may also be able to reduce your current income tax burden by contributing to a traditional 401(k), 403(b) or IRA, since those contributions are made on a pretax basis, effectively lowering the amount of your income that’s subject to taxes. But how much can you contribute annually? The maximum contribution limit for 401(k), 403(b), and most 457 plans (available for governmental and certain nongovernmental employers in the U.S.) in 2020 and 2021, is $19,500. If you’re 50 or older, you can contribute an additional $6,500 in catch-up contributions, for a total of $26,000. The limit for IRA contributions also remains unchanged at $6,000, with an additional $1,000 for catch-up contributions if you’re 50+, for a total of $7,000.

2. Setting it and forgetting it.

Saving for retirement through your employer’s plan may be one of the smartest decisions you make. That’s because most plans provide an easy, automated way save, which eliminates the need to remember to transfer money to savings each month. Many plans also offer matching contributions, which can exponentially increase the value of your retirement plan assets over time, assuming you are contributing enough each year to capture the full match. However, it can also be easy to forget to increase the amount you contribute each year, or ensure you’re receiving the full plan match, if your plan does not automate these features. Be sure to review your plan at least annually to ensure you’re taking full advantage of important features and benefits, which may include employer matching contributions, automated annual deferral increases, and the ability to choose pretax and/or Roth contributions. (Plan provisions vary by employer. Check with yours for a list of plan features and benefits available to you.)

3. Claiming Social Security too early.

When you choose to begin taking Social Security makes a big difference in the amount you will receive in retirement. Age 62 is the earliest you can claim benefits. However, if you begin taking benefits at age 62, rather than waiting until your normal retirement age (NRA)—when you’re entitled to receive your full, unreduced Social Security benefit amount—you can expect about a 29% reduction in monthly benefits (adjusted annually for inflation) for the remainder of your life. On the other hand, if you wait until age 70 to start Social Security, your benefit amount will be approximately 77% higher, than if you started at age 62. That’s because you receive delayed retirement credits for each month you wait to file for benefits beyond your normal retirement age. There is no additional benefit increase after you reach age 701. Keep in mind, with few exceptions, you can’t stop and restart Social Security benefits at a higher amount later. So, it’s really important to understand whether or not a reduced benefit will be enough to help you meet all of your goals and expenses over a 20 or 30+ year period in retirement.

4. Failing to plan for rising healthcare costs.

As retirees enjoy longer average lifespans, healthcare costs will remain a significant expense in retirement. This is important because Medicare only pays for a portion of expenses for those age 65 and older. Retirees must pay for other expenses, such as dental, vision and hearing services, and prescription drugs, either out-of-pocket or through supplemental insurance plans. Notably, Medicare does not cover long-term care services—one of the highest expenses many retirees may incur. In fact, a recent study revealed that the national median cost per year in the United States for assisted living is roughly $51,600, while home health aide services average nearly $55,000, and nursing home care averages just over $105,000 for a private room.2 This is important because, according to the U.S. Department of Health and Human Services, 70% of adults who survive to age 65 will require long-term services and support during their lifetime, with 48% receiving some paid care. That makes it critical to incorporate future health care spending into your retirement planning.3

5. Relying on work in retirement.

Whether you choose to work during your retirement years out of a sense of fulfillment or the need to supplement income sources—planning on paid work in retirement can be a risky proposition. In a recent survey, 71% of workers said that they anticipated paid work to be a significant source of income in retirement. However, only 31% percent of retirees said they actually derived a portion of their retirement income from work.4 That’s because many people are forced to stop working earlier than planned due to a medical crisis or injury, or other circumstances outside of their control, such as a layoff. Understanding how much you may need to support your lifestyle in retirement, well before you reach traditional retirement age, can help you avoid a shortfall that may compromise your lifestyle goals during this important stage of your life.

To learn about strategies that can help you avoid common pitfalls and optimize your planning, call the office to schedule time to talk.

1 https://www.ssa.gov/pubs/EN-05-10147.pdf
2 https://www.genworth.com/aging-and-you/finances/cost-of-care/cost-of-care-trends-and-insights.html
3 https://aspe.hhs.gov/basic-report/what-lifetime-risk-needing-and-receiving-long-term-services-and-supports
4 https://www.ebri.org/docs/default-source/rcs/2020-rcs/2020-rcs-summary-report.pdf?sfvrsn=84bc3d2f_7

This information was written by Katie Williams, a non-affiliate of the Broker/Dealer.

Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty.