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Avoid 12 costly retirement mistakes – the Motley fool

Most of us are looking forward to retirement and imagine that we will relax more and do many things we did not have enough time for – traveling, reading and sports. How comfortable and secure our retirements are depends on how well we prepare ourselves – and how many intelligent moves and how few mistakes we make.

It's very risky to leave much of your retirement to chance as it increases your chances of you running out of money long before you're out of breath. For best results, be the master of your own retirement and make smart decisions.

  A close-up of a sneaker stepping on a banana peel

Source: Getty Images.

There are 1

2 general – and expensive – retirement errors to avoid:

1. Not having a plan

The most fundamental mistake that millions make is simply not a plan. According to the Retirement Confidence Survey 2017, only 41% of respondents said that they or their spouse took the time to estimate how much money they need in retirement.

There is no unit number for asking much what you need to save for retirement, but some experts suggest that you aim for 80% of your income at the time of retirement. If you're retiring and earning $ 75,000, you should aim for $ 60,000 a year. That would be your entire needed income. Some of these will probably be social security benefits, and much will likely come from your savings. One way to find out how much you need to save is to reverse the 4% rule and multiply the desired annual income from your nest egg by 25. (The 4% rule is a very rough indication of how much money you can withdraw from your Nestei retirement to make it last.) So, for example, if you have $ 25,000 from your Nestei in your first year of retirement would you multiply it by 25 and get $ 625,000. You would have to retire with $ 625,000.

Once you know how much your retirement requires, you need to figure out how to accumulate that amount. You may need to increase your savings, reduce your expenses, and / or take on a part-time job for a while.

. 2 Poor Tax Benefit Pensions

Another mistake is not to use the retirement accounts available to you, such as traditional and Roth IRAs, and traditional and Roth 401 (k) plans at work. With a traditional IRA, you make pre-tax money, reduce your taxable income for the year, and lower your taxes. (Taxable income of $ 75,000 and a contribution of $ 5,000? Your taxable income falls to $ 70,000 for the year.) The money grows on your account, and if you deduct it in retirement, it becomes your normal income tax rate at that time taxed – which is often lower than your current rate.

With a Roth IRA you make Post – tax money that does not reduce your taxable income in the contribution year at all. (Taxable income of $ 75,000 and a $ 5,000 contribution? Your taxable income remains $ 75,000 for the year.) That's why the Roth IRA is a big deal, though: Your money grows on the account until you retire it – Free tax . For 2018, the IRA contribution limit is $ 5,500 – plus $ 1,000 for the 50 or older. Meanwhile, 401 (k) s also come in traditional and Roth varieties, and their contribution limits for 2018 are far steeper – $ 18,500 plus an additional $ 6,000 for those 50 and more. The following table shows how much you can accumulate by collecting different sums that grow at an annual average of 8%. Remember that if you do this within a Roth IRA and / or a Roth 401 (k), the following amounts may be tax-exempt. If you're in a 25% tax bracket and have a $ 500,000 Roth account left, you can avoid paying $ 125,000 in taxes.

Growth of 8% for

$ 5,000 Yearly

$ 10,000 Yearly

$ 15,000 Invested Annually

15 years

$ 146,621

$ 293,243

$ 439,864

20 years

$ 247,115

$ 494,229

$ 741,344

25 years

$ 394,772

$ 789,544 [19659020] $ 1.2 million

30 years

$ 611,729

$ 1.2 million

$ 1.8 million

Calculations by Author

No matter what sum you need, the sooner you start to save and invest, the better off you will be – even if you only in your 30s are. The younger you are, the longer your money can grow for you.

. 3 Payout of 401 (k) Accounts

Today, workers change jobs every few years, which means they contribute to many 401 (k) accounts over time. It is also very common for workers to pay off these accounts when changing jobs. Do not do it. Early repayments lead to 10% penalties – plus income taxes. Worse still, you're forfeiting your future when you pay off your 401 (k) – and even less so, when you borrow money from it and many dollars for a number of years are unable to grow for you. [196592002] Even if your 401 (k) only has $ 20,000 when you leave your job, if that sum can continue to grow for another 20 years and has an average annual growth rate of 8%, it will grow to more than $ 90,000 ( 19659003) a middle-aged man at a table with his head in his hands "src =" https://g.foolcdn.com/editorial/images/483458/social-security-mistakes-retirement-income-financial-performance_large.jpg "/>

Image source: Getty Images.

. 4 Saving for Retirement

Most of us are reluctant to do various things we need to do – but postponing preparing for retirement is a very costly form of procrastination. To understand how expensive you are, imagine that you want to invest $ 8,000 a year for 20 years to finance your retirement, and you expect an average annual return of 8%. What happens if you postpone it and start this investment too seriously in two years? Well, if you cut $ 8,000 annually for 18 years and it grows 8% a year, you'll end up with $ 323,570. What if you did not delay your plan for a full 20 years? Well, you would end up with $ 395,383 – more than $ 70,000 more. Also, note that you end up with more than 70,000 additional dollars just because you made two additional $ 8,000 investments or $ 16,000. The earliest dollars you invest have the most time to grow. By aggressively saving and retiring, you can leave many thousands of dollars on the table.

The following table provides more examples of how a few years can make a big difference. For example, keep in mind that if you sack $ 10,000 annually for 25 years, it would grow to nearly $ 790,000 over 25 years. If you started five years late, you would have accumulated about $ 500,000 over 20 years – that's almost $ 300,000 less.

Invested for 8% [$19659015] $ 5,000 Annually

$ 10,000 Annually Invested [19659015] $ 15,000 Invested Annually

15 years

$ 146,621

$ 293,243

$ 439,864

18 years

$ 202,231


$ 606,696

20 years

$ 247,115

$ 494,229

$ 741,344

23 years

$ 328,824

$ 657,648

$ 986,471

25 years

$ 394,772

$ 789,544

$ 1.2 million

Calculations by author.

. 5 Assuming social security is sufficient

Another mistake is to assume that the social security benefits you receive in retirement will be sufficient (or almost sufficient) to support you. In many cases this is not the case. Consider the following: The average age pension for social security has recently been $ 1,411 a month, or just about $ 17,000 a year. Of course, if you've made above-average earnings during your working hours, you'll earn more than that – but not necessarily much more. The m aximum benefit for those who retired at full retirement age was $ 2,788 a month recently – or about $ 33,000 for the entire year.

Experienced planners will find out what they can expect from Social Security and will integrate it into their plans. On the Social Security website at www.ssa.gov

  you can get an estimate of your expected benefits, an elderly couple sad and shocked by some papers

Image Source: Getty Images [19659041] 6. Underestimation of Health Care

We all know that health care is extremely expensive, but we do not always remember to include it in our retirement planning. The study on retirement trust in 2018 found that only 19% of workers took the time to estimate how much money they need for retirement health care. There is no way to know exactly how much you need, but it will help you to get a rough idea. So think about it: A 65-year-old retiring couple will spend an average of $ 275,000 on health care, according to Fidelity Investments. (This does not include long-term care costs.)

One way to alleviate this burden is to be smart about Medicare, choose the plan that best suits you and make the most of all program offerings. For example, be good at preventive and preventive care and reduce your health costs by staying healthier. Long term care insurance is worth considering, but it is imperfect and quite expensive, the older you are when you sign up for it.

All in all, one could afford a health care by saving more aggressively and working toward a goal bigger nest egg. Or delay the onset of social security to end up with more extensive benefit checks. Other possible options for some include reverse mortgages or tapping life insurance policies for extra income, though that is to the detriment of the heirs.

. 7 Underestimate How Long You Will Retire

The most common age at which Americans retire is 62 or 63. There are many reasons why it is good to retire as early as possible – but it can also be a dangerous gambit if you lead a very long life.

It is estimated that around 72,000 centenarians live in America – people over the age of 100 years or older. If you live to 100 and retire at the age of 62, you will see 38 years of retirement. If you only live to 90, that's still 28 years in which to keep your dollars. According to the Social Security Administration, "About one in four 65-year-olds will live today at the age of 90, and one in 10 will live at the age of 95."

Because of the opportunity to live a long life Suzuki Orme, the personal financial guru, has recommended that most people should not retire before the age of 70: "Any dollar you do not spend in the 60s is one Dollar that can continue to grow for your 70s and beyond. " (For some people, this advice is sound, but if you've planned well and locked away enough money for retirement, you could retire much earlier.)

8. Retirement will bring some surprises

You could retire earlier than planned. According to the 2016 Retirement Confidence Survey, 46% of retirees left the workforce ahead of schedule, with 55% pointing to health issues or one disability as a cause and 24% to changes in work such as downsizing or job closures

  A manuscript with a marker the words you should know

Source: Getty Images.

. 9 Not Considering Fixed Pensions

It is wise to at least consider investing in one or more annuities for your retirement as it provides almost guaranteed regular income, such as a pension, and it for the rest Your life can do, the chance that you will not have enough money to continue to live in later years.

Stay with fixed annuities, as opposed to variable or indexed annuities. (These can be problematic, with high fees and restrictive conditions.) Here's the kind of income that different people could receive in the form of an immediate fixed annuity in the current economic environment:

Person / People


Monthly Income

Annual Income

65-year-old man

$ 100,000

$ 551

$ 6,612

Seventy-year-old man

$ 100,000

$ 632

$ 7,584

70-year-old woman

$ 100,000

$ 592

$ 7,104

65-year-old couple

$ 200,000

$ 941

$ 11,292

70 year-old couple

$ 200,000

$ 1,036

$ 12,432

75-year-old couple

$ 200,000

$ 1,195

$ 14,340

Data source: sofortannuities.com [19659002] Another strategy to avoid running out of money is to invest in one deferred fixed pension (sometimes referred to as longevity insurance). Instead of paying immediately, it starts paying later, for example when you reach a certain age. For example, a 70-year-old man might spend $ 50,000 on a pension that starts paying him $ 933 a month for the rest of his life from the age of 80.

10th Late for Medicare

Medicare is critical to tens of millions of retirees, and it will likely be critical for you as well. Do not be late on Medicare, or you pay – a lot. Your Part B bonuses (which cover medical services, but not hospital services) can increase by 10% each year you were eligible for Medicare and were not enrolled. Yikes!

So, when exactly should you sign up? Well, you are eligible for Medicare at the age of 65, and you can sign up anytime within the three months prior to your 65th birthday, during the month of your birthday, or within the following three months. These seven months are the first enrollment time.

The thought of missing this period may be worrying, but there is a helpful void: If you are one of the many Americans who are already receiving social assistance when they reach the age of 65, you should be automatically enrolled in Medicare. You can also avoid the late entry penalty and skip the deadline if you are still working at the age of 65 (with health insurance provided by the employer) or if you work as a volunteer abroad.

. 11 Ignoring Inflation

Warren Buffett has said, "Arithmetic makes it clear that inflation is a much more devastating tax than anything our legislature has enacted." He explained that while income tax taxes income, inflation is applied to everything. So, if you earn 4% interest on a bank account in a few years, when inflation is 4%, that profit will be completely wiped out.

Over long periods, inflation averaged 3% per year, but in any case year or period, it can be much higher or lower. For example, in 2015 it was close to 0%, while it was 6% in 1982, 9% in 1975 and more than 13% in 1980. Even at 3%, it can really diminish the purchasing power of your future dollars, as something that costs $ 1,000 may now cost $ 1,810 in 20 years.

Imagine you want to raise $ 875,000 by the time you retire over the next 20 years, and that's enough to support you. Well, if inflation is 3%, these $ 875,000 will have the purchasing power of just $ 484,000 in today's dollars. They would have to collect about $ 1.6 million through retirement to end today with $ 875,000 in purchasing power. Keep an eye on inflation as you prepare to retire – and maybe increase your savings target and your annual contributions. (Also, know that there are plenty of ways to increase your retirement income.)

12. Strategically Not Concerning Social Security

After all, do not just start collecting your social security benefits at some old time. Learn more about it first, because there are ways to maximize your social security and some strategies that you may apply – especially if you are married.

For example, you can increase or decrease your benefits by earning Social Security earlier, or later than your "full" retirement age, which for most of us these days is 66 or 67 years old. A married couple can coordinate their benefits, with the spouse possibly having to start early with the lower expected benefits, so that the other spouse can delay the beginning of the gathering so that these benefits can be increased.

Spend some time Learn about retirement and smart steps, and you can have thousands, tens of thousands or even hundreds of thousands of dollars more than you expected. That can make a big difference in your last decades.

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