Avoiding Black Holes: Common Retirement Planning Mistakes

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Wed Feb 07 2024

Economic Black Holes

“You only get one ride around the sun”, as the song goes, but we don’t know how long that ride will last. Your job is to do your very best to make sure you can complete your mission without running out of resources. With all the different types of accounts, tax laws and unknown costs, crossing through the galaxy of retirement planning can feel like navigating an asteroid belt. As you’re planning your retirement, don’t make these common mistakes:

Starting Late

The earlier you can start contributing to your retirement the better. We can’t go back in time, but starting your retirement today infinitely benefits you over waiting until next month or next year. Even small contributions over time can make a big difference. Remember the Milky Way is just 200 Billion individual stars. 

Also, the IRS offers catch up options for those who may have gotten a later start to building their retirement accounts.

Account type2024 Contribution Limits2024 Catch Up Amount Allowed
401(K) Account$23,000$7,000 for persons age 50+
Individual Retirement Account (IRA)$7,000 for individuals$1,000 for persons age 50+
Health Saving Account (HSA)$4,150 for individuals $8,300 for families$1,000 for persons age 55+

Forgetting Medical Costs

As you age, your medical costs will go up. Hoping that you will remain in optimal health into your celestial years is a nice thought, but you need to bring those heavenly dreams back down to earth. Even with Social Security and Medicare benefits, Retirees should plan on 15% of their annual budget on healthcare expenses.

*Superstar* Tip: If you have a high-deductible insurance plan, you are eligible for a HSA account. This account allows you to put pre-tax dollars aside for healthcare expenses. When used for qualified expenses, you can take tax-free distributions. The funds in this account can rollover year after year, making it a stellar account to add to your retirement planning. 

Not Diversifying

Diversifying your retirement portfolio protects against the natural ebbs and flows of the market. While historic market trends average 10% returns over time, you cannot guarantee that the year you retire won’t be in the middle of a bear market or the year inflation leaps again. Explore having a mix of stocks, bonds, cash, gold, real estate, and small businesses to reduce your risk levels.

For example – If you have all your money invested in one company or one sector, if they lose 50% of their value, so does your entire portfolio. If you have your money well diversified, one stock dropping 50% in value will only make a small dent in your entire galaxy of retirement funds. 

Early Withdrawal

Taking money out of your retirement accounts early can put a crater in your financial wellbeing. Even if you are using that money for a qualified withdrawal, like buying your first home or medical needs, consider the long term impacts of not having that money in your retirement account. The same sentiment goes for withdrawing from Social Security. Even though you can start receiving benefits at 62 - if you wait until age 67, you can receive up to 30% more.

*Lesson Learned* - My parents always encouraged me to contribute to my retirement account, even if it was only 1%. In my early twenties, I had my first corporate job that offered me a 401k. When I was laid off five years later, they offered to pay out my 401(k), and I was giddy for the windfall. I paid early withdrawal penalties and taxes on that money, which left me with a couple thousand dollars - which at the time was a huge amount of money to me. I don’t even know what I spent that money on. I kick myself now for taking that money out early.

Not Working with a Professional

There are many online calculators that will use average market returns and life span estimates to tell you how much you need in your retirement account by age 65. The problem with this is that you will get an average answer. Those methods don’t factor in your desired lifestyle, health issues, inflation, taxes and fees. Retirement professionals can help you align your retirement goals and accounts into the perfect constellation. They will organize your current financial affairs and craft a plan to help you reach your specific retirement needs. Working with a professional will allow you to shoot for the stars when planning your dream retirement. 

Retirement planning can feel as confusing as calculating how much rocket fuel you’ll need to get to Jupiter - but it doesn’t have. We have a network of trusted Financial Planners ready to launch. Contact us today for a free consultation.