You’re planning ahead and saving for retirement, but are you certain you haven’t missed something? It can be easy to overlook a few key factors that may have a big impact on your financial security during retirement. Whether you want to travel or are looking forward to quiet time spent on hobbies, you want your money to keep up with your retirement plans.
To avoid finding yourself with unexpected expenses, consider these four common retirement planning mistakes and how to avoid them.
1. Getting Too Conservative With Investments
It’s sensible to protect your assets when you’re no longer earning a regular paycheck, but there’s a risk when it comes to being too conservative with what you’re investing. While you want to play it safe as you approach and are in retirement, you also need to build savings to last throughout retirement.
If you’re planning to retire at 65, your savings may need to last 20 years or more — and you’ll likely want to maintain the lifestyle you’ve become accustomed to. It’s important for your money to continue growing so that the returns keep pace with the economy and your needs. Consider holding some investments in stocks, particularly if you have enough in savings to keep you going for the first 10 years or so of retirement. A financial advisor can help you determine the best approach for your investments before and during retirement.
2. Ignoring Inflation And Rising Costs
Put simply, inflation is the change in prices for goods and services. When inflation is high, prices typically go up, including items you need regularly, like groceries, gas, and clothing. Over 20 or 30 years, inflation can actually double your regular expenses, leaving you with less money in savings as you spend more than anticipated on everyday items.
It’s essential to prepare for this probable increase in daily expenses. Just like you’ll need your investments to keep pace with the economy, you’ll need to consider what the cost of living may look like in 10, 20, or 30 years. You don’t want to discover that your savings come up short or that you have to forgo a big trip you’ve been dreaming of due to the costs of inflation.
3. Overlooking Taxes On Withdrawals
When you’ve been saving for years and paying taxes on your income, it can be easy to forget that retirement account withdrawals are often taxable. The amount you withdraw from tax-deferred retirement accounts, including traditional IRAs, pensions, annuities, and 401(k)s, is subject to federal and state income taxes.
Keep in mind that you’ll need to cover these taxes in addition to your living expenses during retirement. For example, if you determine $5,000 is enough for day-to-day expenses and incidentals each month, you may actually need to account for $6,000 or more to cover taxes. Including taxes in your retirement plan can help you avoid the surprise of withdrawals that are higher than you expected.
Remember, too, that distributions such as interest, dividends, or capital gains from bank or brokerage accounts will still be considered taxable income. Even some of your Social Security benefits may be taxable. A tax professional or wealth advisor can help you more accurately prepare for taxes in retirement.
4. Underestimating Healthcare Costs
At 65, most Americans start relying on Medicare for their healthcare expenses. Unlike most healthcare provided by employers, though, Medicare doesn’t cover things like prescription costs and dental care. You’ll either need to pay out of pocket or purchase supplemental insurance coverage to help with costs.
While everyone hopes they remain healthy and independent in their retirement years, it’s wise to plan for the “what-ifs.” Healthcare costs are generally on the rise, and you may have unexpected health issues or simply need some help as you age. Including projected healthcare expenses in your planning can help ensure you get the care you need.
Protect Your Retirement Through Smart Planning
A comprehensive retirement plan should include more than your daily expenses and big goals. It should also address and help mitigate potential issues so you can maintain your financial well-being. With a little knowledge and preparation, you can avoid pitfalls associated with these four common mistakes.
Wherever you are in your retirement planning journey, a financial advisor can help answer your questions, explain the options that match your goals, and help you adjust as you get closer to or are enjoying retirement. Contact a BCU Wealth Advisor with questions. Ready to experience the credit union difference? Become a member of BCU!
About BCU: BCU is a not-for-profit, member-owned credit union that is fiercely dedicated to Empowering People To Discover Financial Freedom. With over $6B in assets, BCU is committed to providing a fast, easy, and secure banking experience along with extraordinary service to more than 360,000 members. The BCU field of membership includes employees and their families from Fortune 100 companies across the US and Puerto Rico. Membership is also open to individuals who live or work in Northern Illinois, Southern Wisconsin, and Puerto Rico, as well as subscribers of BCU’s wholly owned Credit Union Service Organization (CUSO), Life. Money. You.®. All BCU members enjoy lifetime access to financial services and well-being programs that inspire confidence through the brand promise “Here Today For Your Tomorrow.”
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