Most people make at least one financial mistake when they retire. In fact, it’s not uncommon to completely botch your finances once you stop working. Here are the most common mistakes, and how to avoid making them when it’s your time.
One of the biggest mistakes retirees make is that they make withdrawals too early. The IRS imposes a 10 percent early withdrawal penalty on all withdrawals from retirement accounts prior to age 591/2.
This is in addition to the normal income tax due on such withdrawals. According to Money Looms, even loans from 401(k) plans can be subject to the 10 percent penalty if you fail to repay them on schedule.
So, to protect yourself, don’t make early withdrawals. And, if you do want to retire early, you will need to find a retirement advisor who specializes in IRS rule 72(t) withdrawals. These are special withdrawals that allow you to skirt the 10 percent penalty. But, the calculations and rules can be complex, and penalties are stiff if you mess up (which is why it pays to work with an advisor when you do this).
For most people, it’s best to wait until your 60th birthday before making any withdrawals. This avoids the potential for errors in the 591/2 calculation or early withdrawal calculations under IRS rule 72(t).
Giving Up The Matching Provision In 401(k) Plans
The matching provision in 401(k) plans allows you to get more money than you otherwise would get from your employer. 401(k) matching contributions typically work like this:
You contribute a sum of money. Your employer matches your sum with a fraction of the amount you contribute. Some employers are generous and match up to $1 for every $1 you contribute. In most cases, employers limit the match by capping it at a certain percentage of your income.
So, for example, your employer might match you $0.50 for every $1 you save in your 401(k) up to 3 percent of your income. It’s still a good deal though, and you shouldn’t neglect it – it will add a substantial amount to your retirement savings.
Not Saving Enough
Most people under-save. While there are no hard and fast rules, most people need to save at least 15 percent of their gross income to have a secure retirement. But, the national savings rate is just 4.9 percent.
If you want to have any chance at success in the future, you need to bump it up by at least 10 percent from where you are now if you’re currently only saving 5 percent of your income.
Not Using Annuities
Most people overestimate their ability to handle and manage risk. According to some insurance companies, immediate annuities are a better way for retirees to get a steady paycheck each month after they retire.
That’s because the swings in the stock market make drawing a consistent income impossible. But, an annuity smoothes out that volatility by converting some or all of your savings to a monthly income stream. The insurer will guarantee your income until you die, with some annuities offering payout provisions after your death.
Author Bio: Allen Foster is founder and primary author at Money Looms. Through Money Looms and his writing, Allen wishes to pass on simplified money insights that people can put to prudent use, to make the most of money that comes into their lives.