The Biggest Mistakes That Will Threaten Your Future Retirement Savings

Your retirement years should be a carefree time of life when you enjoy the fruits of your hard work - and the last thing you want is to be short of money. 

While most people try to put away enough savings and invest for their retirement, a worrying number of Americans are retiring on amounts that aren’t sufficient - and several common financial mistakes are to blame. 

Keep reading to learn more about some of the common pitfalls you’ll want to avoid as you plan for the years after you stop working. 

Overspending    

The single biggest secret to building wealth is spending less than you earn - but that’s easier said than done in our consumer-focused society. 

• US consumers overspent by an average of $7400 in 2019 - that’s over $142 per week. It’s far easier to reign in that relatively small weekly amount than to make up a gap in your savings of several thousand dollars. 
• If your checking account is often overdrawn or you’ve maxed out one or more of your credit cards - unless there was an unforeseen emergency - you’ll want to draw up a budget to keep your expenses in check.
• It’s recommended that every household should have between three and six months’ expenses saved in an emergency fund that’s easily accessible. In addition, you should aim to put away at least 10% of your income each month for retirement while paying your mortgage or rent and debt installments on time. 

Borrowing From Your 401(k) 

It’s almost never a good idea to withdraw from your 401(k) before you’re 59 1/2  or older. Here are some reasons why. 

• The Penalties Are Serious: Although the charges you’ll incur for early withdrawals have been reduced in the wake of the Covid-19 pandemic, it’s still expensive to take funds out of your retirement account - anything from 10% to 25%. 
• You’ll Lose Out On Compound Interest: One of the keys to successful retirement investment is leaving your money to earn interest - and interest on interest. This compounding effect only works if you don’t withdraw early. 

Not Planning For Long-Term Care      

As a young, fit, and healthy person you probably have a long list of goals and expenses to think about - and elderly care probably isn’t one of them. However, neglecting this important expense that may be unavoidable when you’re older could cost you both financially and in terms of your physical well-being. 

• An assisted living facility can cost upwards of $40,000 in today’s dollars while a nursing home can come to double that amount. 
• Considering that these expenses aren’t currently covered by Medicare and most health insurance plans, they’ll need to be financed by your retirement income. 

Depleting your retirement capital or relying on relatives or other forms of assistance to pay for assisted living is a risky strategy at best. By planning for these expenses, you’ll be in a better position to pay for them if the need arises. 

Underestimating The Costs Of Healthcare And Not Having A HSA    

It’s estimated that a currently healthy couple will incur around $275,000 in medical costs after they retire. This substantial amount includes copayments and out of pocket expenses that will need to be paid out of your retirement income. 

• One of the best ways to cover your healthcare costs on a fixed income is by setting up a Healthcare Savings Account (HSA). 
• You’ll need your employer’s cooperation to create this type of account since you’ll be investing pre-tax dollars. The annual limit is $3,550 per individual or $7,100 per family. Any amounts you don’t use for healthcare expenses can be rolled over to the next year. 
• HSA funds can be invested over the years as you continue to contribute and increase your total balance until the age of 65 - even if you’re not working anymore. 

Carrying Debt Into Retirement      

The past decade has seen 50 to 80 year old Americans carrying 60% more debt into retirement. Having to make repayments on credit cards, loans, and old student debt when your income may be lower than it was during your working years could put you in a tight spot financially. 

• As you save and invest for your golden years, you’ll want to make sure that you’re chipping away at your debt - and preferably eliminating it several years before you retire. 
• It may be acceptable to have a small amount of your mortgage principal outstanding since the value of your home will offset this debt if you decide to sell it. 

Conclusion                

A comfortable retirement is something every hardworking person deserves - and by avoiding the mistakes listed above you’ll be laying a strong financial foundation for your later years. 

Budgeting your income and expenses, leaving your 401(k) to accumulate compound interest, making provisions for elderly care, and planning for potential medical expenditures are all wise strategies you can employ to enjoy a fulfilling and financially savvy retirement.