According to Fidelity Investment, around 41 percent of Americans have a Retirement Preparedness Measure (RPM) of 65 or lower, which puts them in the “bad” or “poor” category when it comes to being prepared for retirement.
Thirty-three percent of Americans are in the range of 95 or higher, which stands for high-quality planning. Just around 14 percent of Americans are in the “fair” segment (RPM between 65 and 80).
This means more action is necessary to achieve financial security in retirement. If you don’t have a plan for retirement, you are essentially planning to fail. Here are five critical mistakes that most people make when planning for retirement.
Not interested in retirement investments
Just putting your savings in a cookie jar is not going to ensure a safe retirement. It’s crucial for you to take an active interest in investing your retirement savings efficiently. This takes a bit of time and due diligence on your part. A viable option you can consider is a self-directed IRA (SDIRA). This specific IRA ensures that your portfolio stays diversified and your savings remain invested in good securities.
Not rolling over your retirement account when changing jobs
One of the most crucial mistakes that a lot of people make when changing jobs is to take the balance money in their workplace retirement account to spend it. This is a horrible idea for two reasons. One, you would probably end up losing 30 percent of that money to taxes and penalties. Two, spending that money means you are losing the opportunity to secure your retirement. Make sure you roll over your funds into your new employer’s 401(k). Another option you have is to roll it over directly into an IRA.
Taking a loan against your retirement fund
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A lot of people consider taking a 401(k) loan as the first option when they find themselves in a financially tight situation. If you fail to pay back the loan within a time span of five years or prior to leaving your job, you stand to pay withdrawal penalties and income taxes. Also, while your money is absent from your 401(k), you miss out on potential market returns you could have gained. So, always speak to a financial expert about your requirements and explore other options before taking out a loan against your retirement fund.
Claiming social security before you are 70
To reap the maximum benefit from your social security retirement fund, it is imperative that you complete your “working period” and claim social security benefits only when you have crossed the age of 70 years. When you withdraw money at 62 or even 67, there is a dip in your benefits. Your payout increases every year after 70 by a substantial percentage.
Working out a retirement plan on your own
While it may seem that you are the person who would understand your retirement needs the best, this may not really be the case. There’s a high likelihood of you making emotionally driven or short-sighted decisions when you plan your retirement on your own. By consulting with a financial advisor who is well-versed in retirement planning, knows where to invest, how to navigate through tax traps, and when best to select your benefits, you stand to gain the maximum from your retirement savings.