Today we have the first guest post in TheMoneyCommando history. I’m working on a number of retirement-related posts (see my recent The Death of the 4% rule as an example. Today’s post from Amy Nickson provides an overview of a number of mistakes that people can make in the years immediately preceding retirement.
If you wish to have an ideal retired life full of financial peace, then it is important that you plan for your retirement years in advance. This is because when you retire, you will not have any source of income but your expenses will not go down. You need to determine how you want to lead your life after retirement and plan accordingly.
Thus, if you do not plan well in advance, you may exhaust all your savings and end up in the financial mess. It is also important for you to be aware of some retirement planning mistakes.
Some of the fatal retirement planning mistakes are as follows:
1. Taking out a loan from your retirement funds
Some retirement savings plans allow you to take out loans. But you shouldn’t consider your retirement funds as the savings account. You will be making a big mistake if you try to take out all the money. Thus, the money that was supposed to grow will not be growing. Even taking out a loan for the purposes of managing financial obligations is a wrong decision.
The long-term, tax-advantaged savings accounts are 401(k) plans and IRAs that is generally used as retirement accounts. You need to evaluate 401(k) plans and IRAs to know whether it will be appropriate to take out a loan from these accounts.
Know about the penalties imposed on withdrawal from the 401(k) account
You don’t need to pay taxes when you repay the loan on time but it will be considered under taxable distribution if you do not repay the loan on time. If you discontinue service with the employer you are required to repay the loan in full within 60 days otherwise, the outstanding balance will be considered as a taxable distribution. And 10% penalty tax will be imposed on your regular income taxes if you’re below 59 ½ years. If you borrow from your 401(k) account then you’ll not get the tax-deferred interest that might have accrued on the borrowed funds.
What are the penalties imposed on withdrawing from the IRS account?
There are benefits as well as drawbacks of borrowing from your IRS account. Remember that the growth shall slow down on your retirement account as you have withdrawn the fund from this account. In course of time, if you have changed your job and failed to pay back the owed amount then you have subjected 10% withdrawal penalties.
So, evaluate these points before using your retirement fund.
2. Not determining the amount that you need to lead your life
A common problem that people planning to retire are facing is that they don’t have enough savings to lead a stress-free life after retirement. According to recent research reports, more than about 45% of the Americans are unable to save any money after making their credit card payments.
To have a control over this problem, you will have to minimize the usage of credit cards as far as possible. You should rather use cash to buy items. Try to increase your income through investments and other part-time job options. Put all the extra money into a savings account.
Though you’re retired, there are some things that you need to spend your money on. You need to determine the amount that you may need to lead a comfortable life. Get a clear idea of your past-retirement lifestyle that you want to lead and manage your finances accordingly.
Though you’re retired, there are some things that you need to spend your money on. You need to determine the amount that you may need to lead a comfortable life. Get a clear idea of your past-retirement lifestyle that you want to lead and manage your finances accordingly.
3. Buying a huge and expensive house
You need to take out a big mortgage for an overly large house. The payments on the big mortgage are supposedly quite large too. As your priority should be saving money for securing retirement, you shouldn’t buy a big house that you don’t require.
What if you can’t afford a huge mortgage
The mortgage payments must be one of the greatest parts of your income. There is no way you can stop the payments as this can result in loss of your home. However, you can lower the payments and put more money into your retirement savings account. You can try to get the mortgage loan modified or if that doesn’t work out refinance the mortgage. Loan modification or refinance helps in changing the loan terms – lowering the interest rate and extending the loan term. If this too does not work out, it would be much better for you to try and sell off the home – short sale. But, this can prove to be tough too, as the lender may not agree to short sale your home.
To avoid such scenarios, buy a house that you actually need and pay off the mortgage as early as possible. This way you can save a major part of your income for the retirement days.
4. Not having enough savings
Having a strong financial backup is important to secure your retirement days. Building a financial cushion is possible only if you are able to contribute heavily to your retirement savings. Cut down all unnecessary expenses and save as much as possible.
For example, if you have children, the cost of maintaining the household spirals upwards. But, there are ways you can minimize your expenditures. Pay attention to the things you spend your money on. For easing out the whole process, follow a budget and it would be better for you to use a budgeting tool.
If it comes to the educational expenditures, try to look for scholarships and such other offers for your child. This works a lot towards helping you to lower your expenditures. If you can do this, it would become easier for you to contribute the required money towards your retirement savings, thereby helping you to secure your future.
5. Not making changes in budget
There are many changes faced by the people who are planning to retire within few years. First of all, most of the people do not even care to formulate and maintain a budget while working. In addition, the cost of living and the household costs are increasing day by day. The debt situation is rather seen to be getting out of control. People are trying their best to become debt free. However, what most of the people don’t realize is that to maintain all costs one needs to formulate a budget. Budgeting helps you to save more. However, as people do not budget they carry personal debts even after retirement.
If you’re following a particular budget right now, but you need to make changes in your existing budget so that you get to know how things may affect you positively and negatively.
For example, your health insurance policy can expire as you retire; so, you need to think about its implications as well. Or, you may think of selling off your big home and moving on to a smaller home to save the extra money on utilities.
6. Not making the debt payments
Most people fail to take the necessary steps or plan so that they can lead a stress-free life after retirement. According to financial experts, most of the people fail to do financial management during their earning years and face problems later. You need to determine how you want to lead your life after retirement and plan accordingly.
There will be a number of debt payments that you need not continue in your retirement life, especially the mortgage loan. As you will be paying off your mortgage loan in full till the time you retire, you can adjust your budget accordingly. Tackle your budget in an intelligent manner so that you can stay away from any financial obligations in retirement.
7. Not allotting your assets wisely
If you are a very conservative investor, then you will not be able to build enough wealth for your after-retirement years. On the other hand, if you make risky investments, then you may lose a lot, especially if you are very close to retirement. So it is important that you know how to invest in your resources intelligently.
8. Not giving priority to the financial future
Most of the parents prioritize the educational expenditures of their children instead of their retirement savings. Thus, they invite their children’s student loan debt in their retirement days. Try to look for scholarships or grants for your child. Thus you can lower your children’s educational expenditures. Try to look for scholarships or grants for your child. As this works a lot towards helping you to lower your expenditures. You can also ask your children to consider a side hustle to manage their own educational costs. If you can do this, it would become easier for you to contribute the required money towards your retirement savings.
Final thoughts
Retirement years are the golden years of a person’s life. Nothing can be worse than making debt repayments after you’re retired. As you have very less source of income when you’re retired, it will be difficult to manage financial obligations with such restrained source of money. Maintain a retirement budget and let go of all financial worries in the near future.
Author’s Bio: Amy Nickson is a web enthusiast. She completed her graduation from Oglethorpe University, Atlanta, Georgia. She works as a financial writer and she shares her expertise through her crisp and well researched articles based on money management, money saving ideas, debt, and so on.