Retirement Planning Mistakes You Need To Avoid

Retirement Planning Mistakes You Need To AvoidAs you try and plan for your future, there are a number of retirement planning mistakes you need to be on the lookout. This helps you guard current finances and guides you better into your future. Retirement is not a question of “if” but more of “when.” For some people, it comes faster than they think while for others, they overshoot their timeline.

There are a number of factors that lead to when you get to retire. One of the biggest factors is your start date. You might have heard people saying that the earlier you start with it, the sooner you get to retire. More than just saving early, you get to take advantage of using compound interest to your advantage as well. You need to keep in mind that that average retirement age is now at  66 According to a Gallup survey.

This is one of the retirement planning mistakes people make because they do not have an idea what compound interest is. It is one of the most useful tools when you are trying to save money for future use. What this is is that it allows you to earn interest on top of interest every month. If you have $100 earning 4%, a year will yield you $4. This will then be added to your principal amount. On the next year, you will have $104 earning 4% which is $4.16. As your principal gets higher, your interest earning increases exponentially as well.

This is one of the reasons why you need to save as much and as early as possible is because of your compound interest. It is a retirement mistake when you do not take advantage of it. You will fall behind on your target and miss the chance to retire on your target date. Apart from this, there are a few other mistakes you might commit when it comes to retirement planning. Here are some of them worth looking into.

Thinking that retirement is a long way out

For a lot of people especially the younger generation, they believe retirement is too far away. This is one of the most common retirement planning mistakes which robs you of the chance to retire either on time or earlier than planned. Once you already have this mindset, it now becomes a challenge to save for the future. This is because you believe that there are far more important things to attend to at present.

That may be true where there are immediate needs that require your attention. Bills, utilities, student loan payments, and even mortgage and car payments. However, there you need to understand that retirement will be upon you sooner than you think. Time flies by so fast that you might be surprised you are already nearing it.

The beauty of retirement planning is that consistency early on is the key. You do not have to put in all your extra money into an IRA or your 401(k) at work. You just have to get started with it. The more you get used to it, the easier it would be to save up continuously as you go along. You can also increase the amount a little every year.

Foregoing an employer-matching program is one of the retirement planning mistakes you can make

This is one of retirement planning mistakes people usually make when planning and saving for their nest egg. There are a lot of employers who offer this benefit in the workplace in a bid to attract and retain employees. This is a financial investment on the part of the company to help its people plan for their retirement in the future.

The way it works it that your company matches a percentage of the amount you put into your 401(k). One of the most common programs is the 100% of the first 6 %. This means that the company matches the contribution up to 6% of the gross pay of the employee. This means that if you have a $50,000 annual pay contribute $3000 (3%) of it to your 401(k), the company matches and puts in $3000 as well.

That is why a lot of experts refer to this program free money. Not only will it help you increase your retirement fund, it can also play a big part in how compound interest is computed and added. You just have to make sure that you understand the vesting schedule set by your company. You might lose a lot if you leave the company and transfer to another job.

Gambling on your nest egg too close to retirement

It is not always talked about but one of the retirement planning mistakes people often make is that they take a huge risk too close to retirement. One of the reasons why people do this is because they want to make quick money to help them reach their retirement goal. They might think that taking on a lot of risk for a lot of return is the answer.

It is true that the higher the risk, the bigger the potential reward and a lot of people go into this gamble. However, one thing you do not have is time. If you were to lose a lot of money with that risky move, it will set you back years of work. This means that you have to keep on working just so you are able to save what you need for retirement. You can make the argument of what if you win, but investments are never a sure thing especially the risky ones. If you would have made this risky investment early in the game, you would still have a lot of time to recoup your losses. But if you lose a big amount too close to retirement, you’re in big trouble.

Gambling on your retirement fund while in retirement

You may not go into risky investments before retirement but you also need to be careful with how you manage your finances while in retirement. A part of retirement planning mistakes is not thinking about how you invest your money while in retirement. It is not just about putting your funds in a savings account all throughout your retirement. It should be part of your planning to keep an eye out for possible investment opportunities.

However, what you need to be aware of is that you are no longer in a position to take on high-risk investments. It is better to opt for low risk, low return opportunities. This way, it keeps your principal amount intact while being able to earn more than just what a savings account can offer. You need to be on guard as well on investment scams targeting retirees.

Thinking that you have to fall into a specific identity in retirement

What is your idea of retirement? Is it something you see on tv or an idea your officemates have? Are you planning to simply follow what your parents did for their retirement? One thing you need to understand when it comes to planning for retirement is that you need to know what you want for yourself. You can certainly look at what other people are doing but you need to decide for yourself. Define your retirement before you start saving money for it. Doing so will help you concentrate your efforts on your objective.

There are a lot of retirement planning mistakes people make that is why they are having problems during their golden years. That is why it is best for you to know these common missteps to help you plan better.