September 9, 2020
By Rahul Iyer
Not saving enough, borrowing too early, or not getting out of debt can wreak havoc on your golden years – the years you should be enjoying the most.
Retirement is a time of relaxation, fun, and excitement, but it can also be a time of financial difficulties if you aren’t careful. Learn the top three retirement mistakes most people make and how you can avoid them.
The last thing you want to see is another deduction in your paycheck – we get it! But retirement savings invest in your future. While it seems like a sacrifice today, you’ll appreciate it when you retire.
Waiting too long means higher monthly savings and more aggressive investments to reach the same level you would have if you invested earlier. There’s no guarantee you’ll ‘catch up’ to what you could have earned if you invested earlier either. Market returns are never guaranteed. If you want $1 million saved by age 67, here’s the difference in how much you’d have to save each month by starting age:
Age 25 - $361/month
Age 35 - $726/month
Age 45 - $1,626/month
Starting early makes sense as it gives your money more time to compound and grow.
Borrowing from your 401K may seem like a great idea. You don’t have to qualify for it (as long as your plan sponsor allows it) and you get five years to pay it back. You even pay it back with interest (to yourself), how could you go wrong? You could go wrong – here’s what could happen:
You stop making contributions while you pay back the loan. Not only does this deprive your account of new contributions, but it also eliminates any possibility of compounding your earnings (letting your earnings grow). You miss out on the employer match. If you aren’t contributing to your 401K account, neither is your employer. That’s like throwing money down the drain.
If you leave your employer, you may only have 2 -3 months to pay the loan back in full. If you don’t they count it as a taxable distribution, which costs you a 10 percent penalty plus applicable taxes.
You don’t have to be debt-free going into retirement, but going into it with too much debt can be detrimental. Unless you figured the cost of the debt in your monthly cost of living, it can throw you for a loop. Suddenly you’re withdrawing more than you intended from your retirement accounts, depleting the funds much sooner than you anticipated. Ideally, you should enter retirement with no debts, but since that’s not always possible, at the very least, pay off as many debts as possible, specially any home equity lines of credit or credit cards as the interest rates are variable and the payments unpredictable.
Don’t assume you’ll be ready for retirement – you have to prepare yourself and that means avoiding the top retirement mistakes. With the right steps including saving early, saving enough, not borrowing, and getting out of debt, you could be well on your way to the wonderful golden years you envision.