9 things you shouldn’t do before you retire
To help you avoid some costly mistakes, here are the nine things you should not do before you retire
Advice abounds on all the things you should do before you retire, but rarely do you hear about the equally important things you shouldn’t do. It’s often difficult to discern and information offered to seniors can sometimes be confusing or contradictory. It’s helpful to do your due diligence, and even seek advice from a professional financial adviser, if necessary, before making your retirement decisions. There are many sources to help you decide what to do at what time in your retirement process. To help you avoid some costly mistakes, here are the nine things you should not do before you retire:
1. Don’t Claim Your Social Security Benefit Early
Claiming your Social Security benefits early can be really tempting, especially if you ever find yourself in a financial pinch and are desperately needing the money. However, claiming early is something you really want to avoid if possible. Depending on when your birthday is, the age in which you can draw full retirement falls somewhere between sixty-six and sixty-seven as of today. Claiming your Social Security benefits any earlier than this will lock you into a reduced monthly payment for life, costing you significant money in the long run. Claiming your Social Security at age sixty-two permanently reduces your monthly payment by 25%. On the other hand, if you make it all the way to your full retirement age without taking any benefits and continue not taking benefits, your payout will increase by 8% for every year past full retirement age until you hit seventy.
2. Don’t Withdraw From Your 401K
Like claiming your Social Security benefits, withdrawing from your 401K early can be really tempting, especially during financial woes, but it carries equally stiff repercussions in the long run. Even putting these repercussions aside for the moment, withdrawing from your 401K means that the money will no longer grow unless you are planning on reinvesting it (which isn’t an optimum choice either). Unless absolutely necessary, it’s better to let the money sit and grow. Besides this, even if you manage to be allowed a hardship withdraw to take money from your 401K you will not be able to pay into it for the next six months. If you are not granted a hardship withdraw and you still take money from your 401K you won’t ever be able to put the money back. It’s better to let your 401K grow and cash out once you retire.
3. Don’t Overlook Tax Breaks
There are a lot of factors that people consider when determining how to invest for their retirement, but one of the most often overlooked of these factors is tax breaks. This is a shame, since investing in the option that cuts back the most on taxes is often the quickest way for you to save for your retirement. By choosing to invest your money in a tax-favorable 401K plan or IRA, you are enabling your tax-deferred earnings to compound. Along with this, some plans will give you an immediate tax break on your taxable income for each year that you contribute. By choosing an investment route that will offer you the maximum amount of breaks when tax season rolls around, you can save your money much quicker, making investing in a tax-favorable 401K or IRA a much better option than just putting your money in a savings account.
4. Don’t Be Lured Away by Risky Investments
It is true that you are going to have to invest your money in order to save for retirement, but what you choose to invest it in is crucially important. Often times, people complain that their low-risk investments being made in their 401Ks, IRAs and savings accounts are not growing as fast as they would in more risky investments. A pro investor, however, will be quick to point out that they aren’t losing any money either, and that is what is often most important. Investing all your money in a few speculative stocks is that is as likely to bankrupt you as it is to make you wealthy. Most financial advisers will recommend investing some portion of your savings in a diversified stock portfolio, possibly putting your money in a selection of mutual funds. As one gets older, the percentage of money kept in the stock market is usually reduced as you will need access to that cash and it’s a bad thing if you are withdrawing funds when the market is down. The market has ups and downs and your investment won’t have a chance to grow back once you cash it out in a down market. When planning for your retirement, it’s better to stick with investments that will keep your money safe and sound until the time is right.
5. Don’t Hoard Your Money
This advice may seem to run counter to the advice about not getting lured away by risky investments, but they can both coexist quite nicely. When saving specifically for your retirement, it is indeed best to stick with low-risk investments. Your retirement fund is money you cannot afford to lose. For other investments, however, pre-retirement is the optimum time to take a few calculated gambles and see if they pay off. If you do lose out on investment, you are far better set up to quickly recover if you are still working. On the reverse end, if the investment pays off it could help you retire much sooner. Take advantage of your opportunities while you can instead of just hoarding your money away. As the saying goes, no risk no reward.
6. Don’t Put off Saving for Retirement
If you are a twenty-something fresh into the workforce with your sights set on an illustrious career, chances are that saving for your retirement may very well be the last thing on your mind. The hard truth is, however, that most people wait far too late to begin seriously saving for their retirement and are left with too little funds when the time comes. Instead, start as early as you possibly can, even if that just means setting back a small portion of money each year. Statistics have shown that people who begin saving for their retirement as early as age twenty-five will have a substantially easier time reaching their goal than those who wait until they are forty to begin saving. All of this may seem like it could go without saying, but it is shocking the amount of people who wait until they are middle-aged or older to begin saving for retirement. Start young and it will be much easier.
7. Don’t Overlook the Value of Diversification
When saving for retirement, far too many people simply choose a single investment that they feel suits them, whether that is company stock or a 401K, and then pump all of their savings into it. Instead, it is far better to diversify your retirement investments. Diversification reduces the chances of any one investment bankrupting you and is generally proven to lead to more positive returns on your money. Instead of putting all of your retirement funds into one investment, or one type of investment, consider spreading them out across a variety of investments such as bonds, short term investments, as well as your 401K and IRA. By spreading out your investments in this manner you increase your chances of growing your money in a volatile market.
8. Don’t Get Caught Up In Wishful Thinking
Everyone has visions of how their retirement will be, and for most people it is a milestone in their life that they are really looking forward to. Too many people, however, get caught up in wishful thinking and never actually do what it takes to set themselves up for an enjoyable and financially comfortable retirement. Simply envisioning a relaxed and worry-free retirement while doing little to prepare for it is not going to make your dreams come to fruition. Instead, sit down and carefully think about the kind of lifestyle you want to have once you retire. Once you have a pretty good idea of how much money it is going to take to make that lifestyle a reality, start planning and investing to put the money in place.
9. Don’t Put Your Life on Hold
Retirement is often seen as a time when you finally get to do all the things you’ve been dreaming of, whether that be something as grandiose as traveling the world or as simple as sitting back in a lawn chair and watching the sun set. While retirement is a great time to enjoy things such as these, it does come with two caveats. By the time you retire, you are often old and poor (or at least poorer than you were in your working years). By all means, plan for your retirement, invest smartly and do what it takes to ensure you are able to achieve the lifestyle you envision, but if the chance for that dream vacation comes up while you’re still young and wealthy enough to enjoy it, don’t let it pass by. Plan for the future, but take advantage of the present and you will be able to fully enjoy every stage of your life.
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This post is originally appeared in the Business Advice Source.