You can spend 30 years or more for retirement. Getting it right can mean the difference between struggling or living comfortably after quitting.
As your life changes and your goals change, your retirement journey may not go completely straight. No matter how much the road winds, avoiding these five mistakes can help you achieve this monumental goal faster.
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1. Do not contribute as much as possible to your 401 (k)
Achieving the maximum annual contribution for your 401 (k) per year – which is $ 20,000 for 2021 if you are under 50 and $ 26,000 if you are 50 or older – may not be achievable. But you can contribute to everything you can do.
Some of the benefits are tax-deferred growth of your contributions. You will also receive a reduction in your taxable income for any contributions you make to a traditional 401 (k). So if you earn $ 60,000 and can add $ 10,000 to this account, your taxable income in that year will be reduced to $ 50,000. With this type of account, you end up paying taxes on your withdrawals at retirement, but by that time you may be in a lower tax category than when you worked.
Another benefit of a 401 (k) is any agreement by your employer. A matching business contributes an amount, based on your own contributions, to a certain percentage of your salary. For example, if your company matches your contribution dollar for dollar to 5% of your income, and you earn $ 50,000, you can receive up to $ 2500 free money through a contest. If you make sure you contribute at least enough to earn your full employer match, you can reach your goals faster.
2. Do not plan how much you will need during your retirement
Everyone needs a different amount of money at retirement. Figuring out how much you need involves assessing what your future will look like. Will you receive social security benefits and pension after you retire, or just social security? Will your expenses be the same as now, or will you try to reduce them until retirement?
The more sources of income you have and the less expenses you have, the less you need to save. You should also consider the return you receive on your investments and how long you have until you retire.
You can only put money into a 401 (k) and hope for the best. But by using a calculator to make an exit number for yourself, you will be better prepared and less stressed.
3. Do not invest your money in the right way
If you add money to your 401 (k) or IRA and never invest it, just put it in cash and not earn much. If so, you get the tax savings these accounts can offer, but not the tax-deferred growth.
By investing your retirement savings in stocks and bonds, it can also grow faster. If you contribute $ 6,000 to an IRA every year for 20 years and earn an average of 9%, it can grow to nearly $ 264,000. For more than thirty years, it could earn $ 609,000. But if you made a contribution without investing any of it, you would only have $ 120,000 after 120 years and $ 180,000 after 30 years, if you assume you do not earn interest.
Between 1926 and 2019, owning a portfolio consisting of 60% equities and 40% bonds would have yielded you an average 9% rate of return. It is important to remember that the rate of return you receive depends a lot on the market cycle in which you have invested. For example, if you had a much more aggressive portfolio of 100% large-cap stocks between the beginning of 1991 and the beginning of 2021, you would have earned only an average annual return of 8.5%.
4. Immerse yourself in your retirement savings
You can borrow up to 50% of your 401 (k) balance up to a maximum of $ 50,000. There are also exemptions for suffering, such as the payment of medical expenses that allow you to take money out of the account. With a loan, you are responsible for repaying the money. Failure to do so may result in fines and taxes. If you suffer, you do not have to repay the money, but you will owe tax on your withdrawal – and your account balance will be permanently reduced by the amount you withdraw.
It’s harder to grow your accounts if you regularly withdraw money from it. There can be times when you absolutely can not avoid dipping into your retirement savings, but you need to limit it as much as possible. Rather, try to find other ways to deal with it if there is an emergency.
5. Not planned for inflation
You may be looking at your retirement savings balance and mistakenly thinking it’s enough. While it may be enough if you retire today, you should consider that your purchasing power will erode over time, as inflation increases the cost of goods and services.
The average annual long-term inflation rate between 1913 and 2019 is 3.1%. That means you will need $ 1,250,000 over 12 years to meet the spending power that $ 500,000 has today. If you include this important factor in your retirement projections, you can ensure that you do not exceed your savings.
You plan to retire so you can enjoy it, but eventually you can be devastating to get there and discover that you are not having enough. If you avoid the above mistakes now, you can make the most of your savings and avoid this outcome.