Setting money aside for the future is a task we all have to face, whether we like it or not. However, there are ways to make it easier on yourself. The first thing you can do is avoid retirement planning pitfalls, which we will discuss here.
Not Enough Contribution – Knowing when to start saving for retirement is a problem just about everyone faces if they haven’t already begun setting money aside from their very first paycheck. An adage held that saving and investing eleven percent of your income over time would end up in an approximately 70 percent income replacement by the time retirement arrives. Unfortunately, those days are largely over. As life spans increase and investment yields aren’t as high as they used to be, that 70 percent in years’ past translates now to approximately 46 percent.
Even in a well-balanced and diversified portfolio, returns overall are not the same as they used to be. In essence, you can do everything that has been told to be right and correct financially in the past but unfortunately, end up short in the future. However, there’s an easy way to adjust the strategy and make it work for today’s circumstances – just adjust your savings rate. Instead of staying at eleven percent, increase the savings rate to fifteen percent; by doing so, you can still save and invest the same ratio of income that the previous eleven percent would cover. The greater moral to take away here though is that planning for your future today requires more elbow grease than it would have in the past.
Not Accounting for Cash Flow – Another slice of retirement planning that can get lost in the shuffle is cash flow accounting, or anticipating and preparing for what bills you will need to be responsible for taking care of as you age. Are you looking to have a mortgage on your home still or pay it off? Do you have outstanding credit debts that still need to be paid down after retiring? Is your health insurance current and providing sufficient coverage, or will you need to purchase more as time moves forward?
Questions like this need to be asked and accounted for, because they address circumstances that undoubtedly will come up, whether you’re still working or not. A major issue that cash flow accounting especially needs to address is future health care costs. With retirees living longer than ever before, being able to pay for the care you need when it is needed is a known stress factor. Taking full stock of what income you’ll have available to live off of and balancing that against the expenses you expect to have is an important step to take when approaching the planning process responsibly.
Starting Too Late – While most people agree that saving for retirement is important, too many of them still begin later in their careers. If you happen to work at a firm with an auto-enrollment contribution plan, then take them up on that offer as use it as a means to start building your nest egg. Even if your initial contribution rate is small, it’s still a place to start, especially if your plan has an employer-matching option. Take full advantage of it if you can. However, if you’re an entrepreneur or investor, this option likely won’t make much sense for you. In that case, finding a savings plan option, like an IRA (Roth or regular) may make more sense. The best option is to research which methods are available to begin investing in immediately, weigh their pros and cons, tax benefits and disadvantages, and then proceed from there.
Tapping Into Retirement Funds Early – Emergencies happen in life all the time, be they medical, professional, personal, etc. You’re involved in a car accident, for instance, that not only wrecks your vehicle but also places you in the hospital for extensive treatment. Even if you have decent auto and health insurance, you still may be left on the hook for expensive bills. Tapping into a 401k is an option many people will often use in such cases if they have money set aside in one already.
While this option will solve the short-term problem, if utilized too often then you run the risk of having nothing left for your retirement when the time comes. A simple solution that can solve this problem is establishing an emergency fund account that exists outside of your 401k or IRA plans. Look at your monthly budget and income, see what’s already being allocated for retirement saving, and figure out a percentage of remaining income that can be set aside for emergencies. A good rule of thumb is to have a fund that holds approximately six months worth of regular income solely for emergency circumstances.
When it comes to retirement planning and wanting to have better control, QRPs are hard to beat. QRPs (or ‘qualified retirement plan’) are great if you’re self-employed or own a business and are looking for the most tax-beneficial plan that also provides fantastic control of what you do with it. A QRP will minimize taxes and other fees that different savings plans create while allowing you also to borrow from it without trouble.
If this is an option that sounds helpful for your retirement plans, then the team here at Anderson can help you set one up with a minimum of fuss. The first, and most important, step you’ll need to take is to contact us. Click here then to schedule a free 30-minute strategy session with one of our advisors. It’s free, it’s helpful, and it will get the ball rolling to secure your retirement future for good.