Don’t Trip Yourself Up on the Road to Retirement Savings
Published on August 13, 2015
Baby boomers who are reaching or have reached retirement age can look forward to about 20 years (or more) in retirement.
According to the Social Security Administration, one quarter of Americans who are age 65 today will reach age 90, and 10 percent will live past age 95. That’s a lot of time for enjoying hobbies and interests, perhaps a second part-time career or side job, and more. But how will you pay for all of that? Do you have the retirement savings necessary to live off those funds comfortably?
Some people stumble along the path to retirement with these avoidable blunders:
Failing to Plan for Retirement
Have you ever heard the saying, “Failing to plan is planning to fail?” It surely applies to your retirement savings. Start thinking about this early in your working life; open an IRA, take advantage of an employer’s plan, and work with a financial planner or tax professional to create a road map for a comfortable retirement.
Planning also means thinking about your retirement cash flow—how and where you will get and spend your retirement money. Revisit your road map periodically and make course corrections along the way to ensure you are being aggressive enough to meet your retirement goals. In addition, factor in the erosion factor inflation plays—today’s dollars won’t buy as much in 20 years and inflation needs to be calculated into your cash flow scenario.
Failing to Save Adequately for Retirement
Be diligent and disciplined about funding your retirement plan; even small, consistent contributions add up over time. If there are luxury or discretionary expenses you can forego now in order to save more, think about the long term (and give up some goodies in the short term if necessary). If you are self-directing your IRA or 401(k) you can boost the power of those contributions through nontraditional investments that may perform better than stocks, bonds or mutual funds. Find out if your employer offers a 401(k) match and if so, be sure to make the necessary contributions to meet that.
Dipping Into Your Retirement Account Too Early
There are certain needs for which you may take an early withdrawal from your IRA (such as higher education or first-time home purchase) but it’s always best to allow those funds to continue to build. Compound interest on certain instruments grows over time and of course, in self-directed retirement plans, alternative assets—such as real estate or commodities—may need a longer time horizon before paying off as desired.
Jumping Into “Hot” Investments vs. Maintaining a Cool Head
Rather than jumping into today’s hot stock or “can’t lose” investment, take a more studied approach to your retirement plan. Self-directed account holders have more latitude about the investments they can include, and therefore, are less subject to the vagaries of an unsteady market. Rather, they are doing the research necessary to make smart investment decisions regarding a wide range of alternative investments they may include in their plans. At Next Generation Trust Services, we strongly encourage our clients to thoroughly research their target investments and really understand what they’re about.
Taxable vs. Tax-Free Retirement Money
Depending on which type of retirement plan you choose, the funds are either taxed going in (Roth IRA) and grow tax free, or grow tax free and are taxed upon distribution (Traditional IRA). Both of these types of retirement plans may be self-directed. Be sure to discuss your tax strategy around these with your trusted advisor so you are on the right route for retirement.
Forgetting Those Health Care Expenses
As we’ve written about before, many people don’t take into account the high cost of health care over a long retirement period, even with Medicare and other medical insurance plans. There’s plenty that isn’t covered, so factor in this retirement expense when you are contributing to your self-directed retirement plan or self-directed HSA (for those with high-deductible health plans).
Filing Too Early for Social Security
If you can wait until you reach full retirement age before taking Social Security benefits, you’ll be better off over the long run. Taking benefits as early as age 62 (which is allowed) will yield a lower monthly amount for life vs. waiting until full retirement age (66 for those retiring in 2015). If you can wait even longer, until age 70, you’ll enjoy a higher benefit if you delay ‘til then. This is another reason why building a robust retirement account is so very important—besides the fact that it seems the Social Security Trust Fund is in continuous danger of being depleted.
Don’t trip on the road to retirement!
Plan ahead, plan early and contribute often, and—for those who are self-directing their retirement plan—make wise investment choices that you know and understand. Our helpful professionals at Next Generation Trust Services are here to answer any questions you have about self-directed retirement plans and to ensure your nontraditional investments meet IRS guidelines.