When you retire, do you hope to travel, spend time with family and just relax? Turning those retirement plans into a reality involves major decisions that can determine your financial trajectory for years to come.
Research suggests people who work with a financial advisor feel more at ease about their finances and could end up with about 15% more money to spend in retirement.1
A recent Vanguard study found that, on average, a hypothetical $500K investment would grow to over $3.4 million under the care of an advisor over 25 years, whereas the expected value from self-management would be $1.69 million, or 50% less. In other words, an advisor-managed portfolio would average 8% annualized growth over a 25-year period, compared to 5% from a self-managed portfolio.2
SmartAsset’s no-cost tool simplifies the time-consuming process of finding a financial advisor. A short questionnaire helps match you with up to three fiduciary financial advisors, each legally bound to work in your best interest. The whole process takes just a few minutes, and in many cases you can be connected instantly with an expert for a free retirement consultation.
Advisors are rigorously screened through our proprietary due diligence process.
Being aware of these seven common blunders when planning for retirement can help you find peace of mind and avoid years of stress.
7 Crucial Retirement Planning Mistakes
Taking Social Security Too Early
If you want your maximum Social Security benefits, you’ll need to work until your “full retirement” age.
But benefits at age 62, 66 or 67 are not your maximum benefits. The maximum Social Security retirement benefit kicks in at age 70. If you claim before, you’re not getting your full entitlement.
Each year after full retirement, your payout increases by a certain percentage based on specific criteria. To maximize on this strategy, we recommend holding off until you are 70 – if your situation allows. Payments will be the highest possible, increasing by 8% each year you wait.
While this strategy will help you collect the highest Social Security benefit, every situation is different. Consult a financial advisor to figure out how and when Social Security benefits should factor into your unique retirement plan.
Borrowing Against Your Retirement (Unless It’s an Emergency)
If you find yourself strapped for cash, taking out a 401(k) loan might be your only option. However, a 401(k) loan shouldn’t be the first place you look for extra money.
While any interest you pay on the loan is paid back into the account, you also have to consider the opportunity cost of missing out on market returns while the money is absent from the account. You also run the risk of having to pay income taxes and withdrawal penalties if you’re unable to pay it back within five years or before leaving your job.
Always speak with a financial advisor before considering this option. You can get matched with up to three fiduciary financial advisors using this free tool. Fiduciaries are legally obligated to work in your best interest.
Tapping Into Your 401(k) or IRA Before Required Minimum Distributions
You can start withdrawing money from your 401(k) when you turn 59 1/2, but that doesn’t mean it’s a good idea. The law doesn’t require you to start taking RMDs until you turn 72, so this is time your money can keep growing with compound interest. Consider using other income streams first.
Tapping Into Your Roth Before Exhausting Other Options
If possible, put off withdrawing money from your Roth IRA as long as possible. You paid taxes up front so you can take money out of your Roth IRA and it won’t count as taxable income.
Your Roth IRA also will continue to grow tax-free as you tap into your other accounts. Since a Roth IRA holds after-tax funds and the IRS doesn’t need to tax it again, you also don’t need to take Required Minimum Distributions. This account can keep growing for as long as you don’t touch it.
Hiring an Advisor Who Is Not a Fiduciary
By definition, a fiduciary is an individual who is ethically bound to act in another person’s best interest.
All of the financial advisors on SmartAsset’s matching platform are registered or chartered fiduciaries. If your advisor is not a fiduciary and constantly pushes investment products on you, use this no-cost tool to find an advisor who has a legal obligation to act in your best interest.
Not Considering Your Spouse’s Social Security Benefits
You can delay claiming your own Social Security benefits and reap half of your partner’s payout if your marriage (current or not) has lasted a minimum of 10 years (although several conditions apply). This can be beneficial if your spouse was a higher earner, since the calculation for spousal benefits will be based on the spouse’s salary. Widows and widowers are also able to benefit from a spouse whose earnings were higher.
Planning for Retirement on Your Own
It goes without saying that planning for retirement is extremely important and incredibly unique for every single one of us. Making the most informed financial decisions as early as possible can help reap huge benefits down the road. Short-sighted, emotion-driven investment decisions can lock in losses, not to mention the complicated tax implications of investing over the long term.
Financial advisors are well-versed in retirement planning and can help you determine where to invest, when to elect your benefits, what order to withdraw funds and how to best avoid tax traps.
Chances are, there are several highly qualified financial advisors in your town. However, it can seem daunting to choose one.
Our no-cost tool makes it easy to find a vetted advisor so you can make an informed decision, compare, and choose the right one for you.
Sources:
1. Journal of Retirement Study Winter (2020). The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of your future results. Please follow the link to see the methodologies employed in the Journal of Retirement study.
2. Vanguard (Feb. 2019), Putting a Value on Your Value. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of your future results. Please follow the link to see the methodologies employed in the Vanguard whitepaper. To receive a copy of the whitepaper, please contact compliance@smartasset.com.
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Here’s a twist. Don’t spend to little. Investments are just a number on a piece of paper. Your good days are numbered especially after your retirement date. Enjoy!
IT’s been a while since I’ve looked at normal SS age vs delayed retirement payments. When I did, it turned out that if us live to the statistical average (84 men, 86 women) the cumulative money received is the same. if heredity says that you will live until 80 you’re helping SSA. Likewise if you have genes blessing you to live to 90 you will net out more money by not delaying SS
This article grossly over-simplifies many issues. I found the comments, especially by “Ed” of more help.
One, there’s no one answer for everyone as to when to take Social Security. Your health & family history might make waiting until age 70 a bad idea. Also depends on whether you need the Social Security to pay your bills or you just plan to invest it. Everyone’s situation is different.
Similar to taking RMD’s before age 72. Sometimes starting them early spreads out the tax hit over a longer period, keeping you in a lower tax bracket. Plus, you get the tax favored advantages of the Roth for longer. As a slight aside, I wish there was more information questioning the traditional, “always max out your tax deferred IRA/401K investments” KoolAid. Financial advisors always push this strategy so as to defer the taxes until you’re in a lower, post-retirement tax bracket. But what they don’t tell you is, upon retirement, all withdrawals from those tax deferred accounts are taxed at your higher, ordinary income tax bracket. I discovered, too late, that I would have been better investing some of my 401K money into straight taxable accounts and just paying the lower, long term capital gains taxes each year. Oh well.
Finally, I’m sure there are good, fiduciary financial advisors out there. But they’re not always easy to find. I’ve been my own financial advisor for over 30 years and have never regretted it. In my work as a tax preparer, I see countless clients 1099 financial statements each year. And I almost cry seeing the exorbitant fees my tax clients pay their financial advisors to generate returns that don’t even match my, low maintenance, John Bogle inspired, investment returns. Just be careful !
Gary – I disagree that you would have been better off investing the 401k money into a taxable account. The money you put into a 401(k) is pre-tax and continues to grow tax free. When you eventually withdraw those funds, you pay ordinary income tax on both the gains and the initial investment. If you invest in a taxable account, you are investing with money that you have already paid ordinary income taxes on, and then you pay capital gain taxes on any gains in the taxable brokerage account. Also, the other benefit of the 401k is that you are likely to be in a lower income tax bracket when you retire, so it is better to defer the taxes until retirement instead of paying the taxes now and investing that money in a brokerage account. Your statement makes it seem like you never have to pay ordinary income taxes on money invested in a taxable account, which is not the case.
There is no guarantee that you will live until 70 to collect Social Security. If you have been wise, SS should just be a little extra to enjoy, not what you live off of. So Carpe Diem and collect that money at 62!!
I concur!
I agree and did take it at 62. Although I kept on working part-time as an engineering consultant.
I disagree on waiting until RMDs kick in.
While everyone’s situation is different, and this doesn’t apply to everyone especially those with small 401(k) and/or IRA balances, waiting until your taking RMDs at 72 is a big mistake if you have a large 401(k) and/or IRA balance.
If you retire at 59 1/2 or later, and are married, consider converting to a ROTH gradually over the many years BEFORE RMDs kick in, thereby controlling what tax hit you’ll sustain and avoid the impact on your Medicare Part B premiums. RMDs are unforgiving and you can’t directly convert RMDs into ROTHs.
Today, being married, you currently have the MFJ taxable income limits of $178,150 in the 22% tax bracket. Wait until you’re 72 and start taking RMDs, then you have to pray you don’t lose a spouse, as the 22% tax bracket limit for single people is only 1/2 MFJ at $89,075. The RMD factor at 72 is currently 27.4 and decreases every year after that. Divide you balance by 27.4 and that’s how much you’ll have as an RMD in the 1st year, then add 85% of your Social Security (100% for Medicare MAGI), any pensions, outside investment income, part-time work, etc. you’ll easily hit the single rate for income taxes & Medicare Part B premiums.
For example, a 72 year old single person with a 401(k) balance of ‘just’ a $1,000,000 requires a $36,500 RMD, then add 85% of your Social Security and you’ve already been bounced from the 12% tax bracket into the 22% tax bracket, and if you also have a pension, you’re Medicare Part B premiums will jump up too. Meanwhile, assuming you retired at 65, you missed 7 years to reduce the RMD by converting some of your balances into a tax free ROTH. If you retired at 59 1/2 you missed 12 years of conversions and tax free compounding.
You can also bet tax brackets are not going to get anymore friendlier in the future with our whopping National Debt.
If you leave your 401(k) and/or IRA balances alone waiting for RMDs, and you (and your spouse) eventually pass, you’re heirs will inherit your left-over large taxable account balances. Being younger and probably in their prime earning years, they could easily pay up to 40% or more in combined state & federal income taxes. You have to pay taxes on the earnings when left alone anyhow, but what you’ve gradually converted into ROTHs, all those earnings are tax free in the future. Money converted into a ROTH at 62 will have had 10 years of tax-free earnings by the time you hit 72.
Your financial situation becomes simpler too with ROTHs, especially if the surviving spouse is not financially savvy as all future withdrawals from Traditional 401(k) & IRA type accounts have to be evaluated for income tax & Medicare impacts.
ROTHs are also a real gift to your heirs as your converted 401(k) and/or IRA inheritance becomes tax free to them (unless the inheritance is insanely huge and runs into estate & inheritance taxes – separate unrelated issues).
I’m one of those people fortunate enough to have both a large 401(k), large IRA balances, and a good pension and I live in a state with no state income tax. So as I convert, I keep my entire tax rate no higher that 22% Federal rate and under the Medicare Part B limit. Because I’m married, I can convert $80k a year under the current tax system assuming I take nothing more out to buy new cars. I’ve been doing this for 3 years now and still have a long way to go. But by the time I hit 72 assuming the tax rates & my marriage situation don’t change, I will have converted $800k into ROTHs which still forces me into RMDs, but they will be smaller. I’ll continue converting for many years after as well. At 82 I’ll have converted $1.6 Mil and so forth. Doing nothing, RMDs would push us into the 24% tax bracket and we’d be paying more each month for Medicare Part B. Having done nothing, when one of us die, the survivor would be paying triple the cost of the Medicare Part B premiums and be in the 32% tax bracket, and that’s in today’s lower tax brackets.
No one knows what the future holds for ROTH conversions or tax brackets, but I’m making the best of the ones we have today which is all we can do. Doing nothing until RMDs kick in is certainly NOT an option for us and many over-savers like us.
Ed, great considerations & advice here — thank you!
Thank you for sharing. This was very informative and helpful.
Nice speech. Most won’t know one of your abbreviations.
Most will lose you quickly.
KISS
???
Really Burt? What was so hard to understand? Maybe you couldn’t follow what Ed was explaining but I and others found it quite informative…and there was no need for the ‘KISS’ comment.
So, don’t take Social Security till 70 and don’t take from your 401K till 72. Not everyone is going to be able to do that
An additional comment: For both my wife & myself, the break-even age for waiting until age 70 vs starting at full retirement age (66 6mo & 66 8mo for us) is 82. So you want to consider: how confident do I (we) feel that we will be around past age 82? And what will my (our) quality of life / ability to ‘enjoy the money’ be at 82+? Will it be better to have more money now (pre-82), when we are more mobile, in better health, and can enjoy it more? We all want to think of ourselves as going strong into our 70s, 80s, even 90s, but obviously there’s no guarantee. You don’t want to be the person that waits till 70 to get the max benefit, then has a heart attack and keels over, or gets hit by a bus, or whatever, at 71.
Buy an index fund, they beat 80% of all managed funds and if advisors are so good why are they advising and not making it in the market themselves.
AGREE!!!
Another big mistake in retirement is to convert too much money from your traditional IRA to a Roth IRA in one year that puts you in a higher tax bracket for that year.
Spousal benefits are available from your current spouse after 1 (ONE) year of marriage.
The 10 (TEN) year requirement applies only to Ex-Spouses.
Looking forward to your help