Top 5 Retirement Planning Mistakes
At Rogue Credit Union, we provide our members with retirement planning services through our Investment Services Department. This team of Financial Advisors and assistants offer financial solutions through its partnership with CUSO Financial Services, L.P.* (CFS). Our Investment Services Team has years of experience in helping members avoid common retirement planning mistakes.
- Carrying too much debt
Debt is the single largest problem when it comes to retirement planning. The amount of debt an individual carries can affect their ability to save during their best earning years, and can also affect their level of disposable income after retirement. Nationally, more retirees are struggling with debt than ever before. Bankruptcy filings are increasing amongst people over the age of 65.
Focusing on reducing debt well in advance of retirement will allow for more savings during your prime earning years. For most people, having a decent retirement is all about having expenses lower than income. We see many people who can have a successful retirement even with modest savings as long as their monthly household expenses, including any debt payments, are less than their income.
- Not saving enough
Going hand-in-hand with carrying too much debt, we often see people retiring without having enough retirement savings to supplement any guaranteed income sources, such as social security. These days, more people are retiring without a traditional pension and therefore social security has become the bedrock of their retirement income. For people without a pension, anything over and above social security must come from personal retirement savings. Unfortunately, studies show that the average amount saved for retirement is less than $60,000. Assuming a high withdrawal rate of 4% (that may not be sustainable over a longer life time), $60,000 in savings will only provide $2,400 in annual income. As you can imagine, that is not a lot to supplement social security. For most people, additional savings are required.
Getting started early and saving significant portions of your earnings (15% is recommended) in a 401k, IRA or other retirement investment vehicle, throughout your earning years is clearly the best way to accumulate savings, rather than depending solely on social security.
- Not getting started soon enough
Many people delay starting retirement savings until they are in their forties or even fifties. By waiting so long, they lose the benefit of compounding earnings over time. Time is the great ally of youth when it comes to retirement savings, but if it is squandered, it is very expensive to make up. Studies show that saving relatively modest amounts early and allowing these savings to compound is far less expensive than waiting and funding retirement later in life.
An easy way to start is to save even a modest amount on a regular basis, say every paycheck or once a month. Then the following year, say you get a raise of 4%, take half of that and add that to your retirement savings. Within a few years you will be saving a considerable percentage of your income and you will barely notice it at all. Continue to do that throughout your working life and you will be amazed at what you can accumulate.
- Not knowing about taxes and penalties
Many people do not understand IRS regulations when it comes to retirement account withdrawals or moving money from one type of retirement plan to another. In addition, tax laws and/or regulations can change every year, and following old guidelines can lead to trouble. The biggest mistakes are made when people do not understand that their retirement account withdrawals are subject to ordinary income tax. This means that an IRA or 401(k) withdrawal will be added to any other income you have for the year in which a withdrawal is taken. This has the potential of pushing a person into a higher tax bracket and significantly increasing their tax liability. Also, don’t forget that the State will take their taxes as well. A person under the age of 59 ½ may also be subject to an additional 10% premature withdrawal penalty. Other mistakes involve the improper use of rollovers to move money.
Getting good financial advice and tax advice can prevent significant problems. Taking the time to get it right is far better than paying the price for making a mistake.
- Not getting advice
Sometimes one of the most expensive mistakes is not getting the proper financial, legal or tax advice for a complex situation. We often see situations where people come to us after the fact and we do our best to help solve a problem. Unfortunately, sometimes we cannot provide a solution because the issue was brought up too late. It is natural for most people to not want to seek professional help, because it can be intimidating or because it can be considered costly. In our experience, getting good advice for a complex financial situation ahead of time is far better than trying to fix something that has already been done. A $1,500 attorney bill does not seem so expensive if it can save you from a $150,000 estate planning error. Likewise, a $300 tax consultation seems inexpensive compared to a $30,000 tax bill. Getting good advice may feel like it is spending money to no purpose, but our experience is that good advice is often well worth the expense.
At Rogue, the experienced CFS Financial Advisors can help you navigate the ins and outs of retirement planning, no matter what stage of life you’re in. Our Financial Advisors can help you create a personalized plan with your goals in mind. We can help you understand tax implications, income strategies and help to ensure you’re getting the most from your benefits. Give us a call today and start planning for the retirement you’ve always wanted.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/[SIPC|http://www.sipc.org/]) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.