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6 Common Mistakes People Must Avoid with Their Retirement Money

6 Common Mistakes People Must Avoid with Their Retirement Money

Introduction

We all look forward to retirement imagining that we’ll spend those golden years of our lives relaxing and enjoying activities we are fond of such as traveling, going on those dream vacations, reading, exercising, etc. A lot of people either entirely ignore retirement planning in their early years or get into some fraud or Ponzi scheme to make some quick money ultimately losing out on their lifelong savings. These blunders keep one away from leading a comfortable life after retirement.

Retirement is one of the important decisions of your life. Therefore, it is critical to make smart decisions based on due diligence at the right time and ensure that you make the most of your life’s savings. The most crucial factor is to avoid some of the common pitfalls and safeguard your retirement future.

Top 6 common mistakes one must avoid with their retirement money and tips on how to fix them.

  1. Not having a plan
  2. Betting on Stocks
  3. Ignoring the potential of your Employer’s Saving Plan
  4. Underestimating future costs
  5. Paying too much on fees
  6. Not planning for medical expenses
  1. Mistake #1 - Not having a plan

    One of the most common mistake people tend to make is having no idea about where to put their money. In simple words, failing to plan for their retirement. You cannot get to live the life you envisioned if you don’t plan and take right actions to reach there.

    How to fix: There is no one-size-fits-all plan, so you must evaluate various options and devise a plan that fits your unique need. There are many options available that can safeguard your retirement money such as - contributing into a qualified employer-sponsored retirement plan like a 401(k) or 403(b) plan or investing into a tax-free retirement account like IRA or even putting money into a regular investment account that has tax advantages.

  2. Mistake #2 - Betting on stocks

    Playing in the stock market with an expectation of getting above average returns is an easy trap. You should avoid betting on the stock market using a large portion of your money. Many people assume they can make quick money and become wealthy by investing in the stock market, but unfortunately it is not a vehicle to become a quick billionaire.

    How to fix: The stock market is good for a lot of things however one must have the right knowledge and knack to investing wisely using the right mix of assets to gain profits. The mantra to success is in moderation. If it is an unknown territory for you, then you must start with a small amount of money instead of using your entire fund so that you don’t regret later.

  3. Mistake #3 – Ignoring the potential of your Employer’s Saving Plan

    A 401(k) is a retirement savings plan sponsored by your employer and contributions to this account are tax-free. Many people reach into their IRA or 401k accounts to take early withdrawals in order to meet emergencies or hardships which ultimately attract hefty penalties. Early withdrawal from a 401k or IRA account is not an ideal situation as you are eating away your retirement future.

    How to fix: Instead of being complacent you must make a conscious effort to consider your 401k as a locked account which is not accessible before retirement. This account can be a boon to your retirement which you will realize when you reach the age of 59 ½.

  4. Mistake #4 – Underestimating future costs

    Majority of the people usually get it wrong when it comes to estimating the money they would need for their day to day living costs post-retirement. The amount you have today may not be sufficient enough to take care of your needs tomorrow. You can only plan a better future if you are specific in anticipating how your future might look like – and the associated costs.

    How to fix: There isn’t any magic number for it, but it’s a simple calculation to guestimate the money required. There are online calculators available to help you estimate the money you would need post-retirement. Or, another simple way to get a realistic estimate of the retirement money is to compute today’s budget and factor in the inflation. The critical part of the plan is to make the right contributions over the lifetime and review the plan year after year to revise your contributions accordingly.

  5. Mistake #5 – Paying too much on fees

    Do you know how much in fees you are paying when it comes to managing your investments and retirement accounts? It might seem to be a nominal amount today or at the beginning of the investment, but, when your finances gradually grow, the fees also grow correspondingly to become a substantial amount. Do consider the interest and dividends that are compounding every year into your calculations.

    How to fix: It is essential to keep a close eye on the fees that you are paying to manage your investments. Also, you must seek advice from a financial advisor and discuss ways to control costs in the long term. In case you realize that you are spending too much money on allocation charges or fees, it is advisable that you change the plan immediately.

  6. Mistake #6 – Not planning for medical expenses

    Rising healthcare costs and uncertain medical issues can be intimidating and may create feelings of anxiety. While your Medicare Part A will cover about 50-60 percent of your healthcare needs, but it will not provide coverage for over-the-counter medications, most dental services, vision or hearing conditions, and long-term care. This means you need to have a separate health insurance plan or supplemental insurance such as Medicare Part B to take care of your healthcare needs. Additionally, you will have some out-of-pocket costs as well.

    How to fix: Don’t forget to budget for healthcare expenses as part of your overall retirement plan as it will allow you to take care of unexpected healthcare expenses in your old age. Also, keep in mind that if you plan to retire early (i.e., before age 65), then you carry the responsibility of meeting your healthcare insurance premiums until you qualify for Medicare. In such a case, your healthcare costs may run substantially higher than average costs.

    Learn the various type of healthcare premiums that you can have at the time of your retirement like Medicare Part B premiums, Long-term Care insurance, Medigap and Medicare Part D coverage to take care of unexpected medical expenses. The most important gift one can give oneself is to stay fit and healthy. Focus on that and make time for exercise and visit doctors for routine check-ups.

Conclusion

Dreaming about a comfortable lifestyle after retirement without a sound financial future is not an ideal situation. Avoid any temptations and value your money because the success of your retirement years relies on you. Make sure that you avoid the mistakes mentioned above and learn the tricks to spend enough to enjoy what you’ve earned while not depleting your savings in your lifetime.

In case you feel overwhelmed, take help from a financial advisor who can help you to develop a holistic financial plan taking into consideration the lifestyle that you desire.

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