It can be tricky to sift through the numerous rules related to retirement planning. But this is a necessity as violating any retirement planning rule could attract taxes and penalties. However, if you know the mistakes to keep an eye out for, you will be able to avoid them and save yourself money.
Here are five expensive retirement planning mistakes that you should be aware of.
- Overspending to Maintain Current Lifestyle
Before you decide on your retirement plan, it is critical you ascertain the money you need presently to maintain your current lifestyle. Usually, most people spend too much money to maintain their lifestyle and this makes it difficult for them to achieve their retirement income goals.
Many experts claim that people should allocate 80 percent of their annual income towards retirement. However, it is best to keep in mind that after retirement, you may end up eating out, traveling, or enjoying a diversity of entertainment options such as watching movies, seeing a show in Vegas, watching a baseball game, and so on. These are expenses you may not have accounted for. Also, in your golden years, some health issues will crop up, and hence, your healthcare costs will be higher.
- Not Taking into Account the Higher Cost of Healthcare
More often than not, people tend to overlook the cost of healthcare during retirement. It is crucial you incorporate these costs into your retirement plan to ensure you have sufficient funds to help you meet your healthcare needs after you retire.
If you think Medicare will pay for your healthcare during your retirement years, you are wrong. You need to take into account your Medicare costs, which are increasing annually, and health insurance costs when doing your retirement planning. This will ensure you are not strapped for cash in your vulnerable years.
- Taking Your Distribution Early or Not Taking Your Distribution
If you have IRAs and employer-sponsored retirement plans, remember you need to be 59.5 years before you can take a distribution. If you take it before you reach this age, you will have to take a hit financially – this is a reality. The government imposes a 10 percent penalty for early distribution if you are exempted. Exemptions are in place for first-time home-buyers or for paying for higher education. However, these exemptions are valid just for IRAs and not employer-sponsored plans.
Also, the law states that it is mandatory you start making annual distributions from your traditional IRA when you hit the age of 70.5. If you don’t, you will be penalized 50 percent on the missed amount.
- Not Starting to Save for Retirement Early
You should never wait to begin saving for your retirement. In fact, the sooner you begin, the higher the chances that you will achieve your retirement income goals. Remember, you will be compounding the interest and when you begin saving early, this compound interest can truly work wonders for your retirement savings.
While it may seem impossible to reach your savings goal, it is crucial you make retirement a priority and set aside money every month to help you reach as close as possible to your retirement savings goal. No one else is going to do this for you and with higher taxes and weak economic prospects, almost every American should be saving more.
- Not Listing a Beneficiary for Your Retirement Plan
Many people don’t make an effort to revisit their retirement plan after creating it. So they may forget to add a beneficiary. If you are unsure about adding a beneficiary or you haven’t added one, check your retirement plan immediately.
If you die without naming a beneficiary, your account will have to go through probate. When this happens, the cost to your heir can be as high as 6 percent of the total account value. This is a huge unnecessary financial hit for your family. It is also a waste of time. It does not take too long to set up a beneficiary, perhaps about 10 minutes. It takes much longer for your family to work this out if you do not do this when you are alive.
Plan Well
Whether it is during your working or retired life, you should be looking to lead a stress-free life and ensure you have ample resources to meet your needs. That is why it is crucial you take retirement planning seriously. Make sure you keep updating your retirement plan based on your current lifestyle.
This will help you save enough for your golden and vulnerable years. If you realize that making mistakes in your retirement planning can prove to be expensive for you and your heirs, you will most likely be more careful.