Let’s face it. We’ve all made a mistake at some point in our lives, but as we get older the stakes get higher and the price for our mistakes can be quite costly. When it comes to retirement, the same holds true. What you do at in your 20s and 30s, can impact what you have in place to retire in your 60s and 70s.
Throughout the course of meeting with clients, we’ve come to realize there are some very common pitfalls and mistakes that people make as they get closer to retirement. Here are the top 5:
1. Using 401(k)/IRA Money to pay off a child’s student loan. This is almost never a good idea, even if you are 59 1/2 or older when there is no longer a penalty to use retirement funds. Dipping into your 401(k) in your mid 50’s would require you to either take a loan against your account or make on outright withdrawal. Paying back a loan to get your 401(k) back to even would seriously reduce what you end up saving for retirement and/or delay the time when you can stop working.
If you opt to simply withdraw the money, you face the same savings deficit plus a higher tax rate for this year, as the disbursed funds would add to her overall income. You’ll also pay a 10 percent withdrawal penalty on top of those taxes.
Remember: There are plenty of lenders who will finance college costs, but none that will lend you money to retire.
Insist that your son or daughter continue to repay these loans. A student loan finance company such as SoFi (www.sofi.com) can potentially offer a significantly lower interest rate on that debt.
2. Delaying your savings start date. If you ask 100 millionaires how they “got rich,” the most common answer will be “start saving early.” The power of compound earnings is the eighth wonder of the world. Ideally, we should start saving for retirement from Day One of our working career. As a recent study by JPM Asset Management demonstrated, waiting even a few years to start saving can dramatically reduce the final size of your retirement nest egg. If you haven’t started saving for retirement, start today. A Chinese proverb says it all: “The best time to plant a tree is 20 years ago. The second best time is today.”
3. Buying too much house. Americans are too often pennywise and pound foolish in our financial strategies. We rightly avoid small indulgences such as too many Starbucks drinks, fancy dinners and impulse clothing purchases. But then we buy too much house at $150,000 over our initial budget. Which behavior do you think will have the most impact on our retirement strategy? The mortgage industry routinely encourages borrowing above 30 percent of your AGI (adjusted gross income). Don’t do it. Stick with less than 20 percent.
4. Taking Social Security at the wrong time. There is no perfect answer to when to start taking your Social Security retirement benefits, but you should think it through. You can begin receiving payments at 62, but your monthly benefit will increase every year that you wait up to age 70. So, should you wait? Not necessarily. You may have financial needs or health considerations that support an early start. Conversely, if you are happy with your other sources of retirement income, including, perhaps, a few years of working part time at the golf course, it might make sense to wait. Do your research on this one. There are several Social Security calculators on the Web. An online social security planning tool that our team has developed will show you the numbers and actions to get the most out of Social Security.
5. Spending too much on your kids. Don’t let your well-intentioned desire to help your children sabotage both your finances and the kids’ ability to stand on their own two feet. Although you may want the very best for your kids, part of that “best” is teaching them the value of money and the importance of self-sufficiency.
As for supporting adult offspring, remember this: The best gift you can give your kids is to be financially secure in your post-career life, so they don’t end up supporting you. Prioritize that over paying the rent or cellphone bill for your smart, healthy, college-educated twentysomething.
These are the top 5 pitfalls, but our August eBook will highlight 101 Retirement Tips you can keep in mind to make wise decisions before an during retirement. We’ll share a download link to this eBook soon.