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Although retirement can be a fulfilling time in people’s lives, it can also be a stressful time.
This is especially true if you fall victim to the following mistakes, so be sure to avoid them at all costs.
1. Over-reliance on social security
Millions of seniors receive Social Security in retirement, and these monthly payments play a critical role in helping beneficiaries make ends meet. But if you plan to live solely on Social Security after your career is over, you’re making a huge mistake.
Contrary to what you may think, Social Security is not meant to replace your previous paycheck. If you are an average earner, these benefits will be equivalent to approximately 40% of your previous income. If your income is higher, they will displace an even smaller percentage.
Since most seniors need about 80% of their previous income to live comfortably, you’ll need to take steps to secure an income beyond Social Security. In most cases, this means funding a retirement plan like an IRA or 401(k) while you’re working, but it can also mean planning to work part-time in retirement, renting out a home as a senior, or a range of other activities. Other possibilities. The key, however, is to realize that while Social Security will help pay your bills in retirement, it won’t be enough on its own to fund your golden years.
2. Assume your cost of living will drop significantly
Many people believe that once they retire, their living expenses will magically decrease. But once you’re no longer working, your monthly bills likely won’t change much.
Think about the things you spend money on today, such as housing, food, utilities, and clothing. These are things you will still need when you are older, and it doesn’t matter whether you were working or not. You may even find that some of your expenses increase in retirement, such as health care and leisure.
In fact, the Employee Benefit Research Institute found last year that about 46% of households spent more money, not less, in the first two years of retirement, and 33% spent more money in the first six years of retirement. . To avoid financial hardship later in life, create a retirement budget that accurately reflects the expenses you will face, and make sure your expected income is enough to support it. If not, you might consider delaying retirement until your financial situation improves.
3. Not taking advantage of catch-up donations
Many workers fall behind on their retirement savings early in their careers as student loans, housing costs and other expenses eat up much of their income. Thankfully, people aged 50 and over have a fantastic opportunity to make up for years of lost savings in the form of catch-up contributions.
If you save in an IRA and are 50 or older, you can currently contribute an additional $1,000 per year, for a total of $6,500 per year (workers under 50 can only contribute $5,500). If you save through a 401(k), you can make additional contributions of $6,000, for a total of $24,500 per year ($18,500 for younger workers).
Unfortunately, many people don’t take advantage of catch-up donations, so they end up falling short when their golden years come. In fact, only 14% of 401(k) participants age 50 and older made catch-up contributions in 2017, according to Vanguard.
If you’re not saving enough, you have to take steps to bolster your savings, whether that’s by cutting back on expenses to free up cash or starting a side hustle and using the proceeds to fund your retirement plan. Otherwise, you might be severely disappointed when your golden years come and you realize you don’t have enough money to do the things you’ve always dreamed of.
4. Forget taxes
Between your Social Security benefits and your savings, you may find yourself with a pretty healthy income stream in retirement, especially if you save well. But don’t think that all this money will be yours. It’s also possible that the IRS is entitled to its share, especially if your retirement income is high.
There are a number of ways you may pay taxes in retirement. First, unless you have a Roth IRA or 401(k), your savings withdrawals will be taxed as ordinary income—which means your top tax rate. The same is true for many types of pensions. Additionally, if your income exceeds a certain threshold, you may be taxed on up to 85% of your Social Security benefits. Finally, just as interest and investment income are taxed during working life, so too are taxes during retirement.
takeout? When calculating your expected retirement income, be sure to factor in taxes. If you plan to withdraw $30,000 from your 401(k) each year and anticipate an ordinary income tax rate of 25%, you’ll only end up with $22,500, and plan your spending accordingly.
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The more thought you put into your retirement planning, the better off you’ll be when your golden years finally arrive. Avoid these mistakes and you’ll set yourself up for a more financially secure future.
CNN Business (New York) First published September 21, 2018: 9:49am ET