No one wants to have regrets when it comes to their finances in retirement. After all, regrets may lead to sacrifices down the line, such as limited travel or downsized housing.
Unfortunately, more than half of older adults say they have regrets when it comes to retirement planning. The best way to avoid this is to learn as much as possible and figure out the missteps that others have made so that you can plan better. Some of the most common regrets made when it comes to retirement finances include:
1. Failing to take full advantage of employer matching
When your employer matches your contributions to a 401(k) or another retirement account, it’s essentially free money for you. Sometimes, other financial goals take precedence in the moment, but you should make every effort possible to take full advantage of employer matching.
Even if other finances seem more important, taking a long-term view of your savings can show how critical it is to maximize matching benefits. For instance, missing out on this advantage can reduce your savings by up to thousands of dollars each year and, even worse, minimize growth in your retirement account. Since investments compound, thousands of dollars missed now can mean tens of thousands of dollars missed down the road.
2. Ignoring the ramifications of retirement taxes
People who save for retirement in traditional accounts will face taxes on their savings when they make a withdrawal. These taxes can be quite substantial since none were paid before the money was put into the account.
They may also owe tax on Social Security benefits and other forms of income. When you do not account for taxes, you can end up with significantly less monthly income than you planned. Part of budgeting for retirement involves tax planning, which includes understanding both federal and state tax rates. With some planning, you can minimize your taxes, but this may involve being strategic earlier in life and opening some Roth accounts, which are funded post-tax for tax-free withdrawals.
3. Entering retirement with too much debt
People can get themselves into trouble with retirement debt in many ways. First, they may have too much debt in the decades leading up to retirement, which makes it difficult to save much money. Second, they may carry too much debt into retirement, which limits the amount of cash they have to live on each month.
While carrying low-interest debt, such as a mortgage, into retirement is acceptable, you should avoid retiring with high-interest debt, like credit card balances. Debt should always be factored into your retirement budget so that you do not get caught off guard. Also, it makes sense to build a significant emergency fund so that you do not have to take on more debt in retirement.
4. Failing to budget
The appropriate amount of money for retirement is different for each person depending on their financial needs during the later stages of life. Sometimes, people save without a clear goal in sight, which can put them at a disadvantage when retirement comes.
You may also find that you actually need much more money than you initially thought. With an upfront budget, you may find that you will need to spend a few more years working to retire comfortably. While no one can budget completely accurately for their financial needs during retirement, even a rough estimate can help you know whether you are on track and what adjustments you need to make.
5. Investing money suboptimally
Not all people feel comfortable investing their money for retirement due to the risk involved, especially considering that a risk profile should ideally get more conservative with age. At the same time, many individuals who did not invest more aggressively when they were younger (when they had time to recover any losses) regret their choice.
So how do you invest without taking on too much risk? A retirement planner can help you figure out an optimal strategy for investing so that you can realize significant growth. In addition to diversifying investments in general, it’s smart to invest in a large range of equities in terms of overall risk.
6. Retiring too late in life
While many people love their jobs, they often regret not retiring sooner once they have gotten the chance to explore new things in life. Some people feel financially obligated to continue working, which is often the result of poor planning early in life. However, some continue working because they truly enjoy their jobs.
Retirement can seem scary as it represents a complete change in routine, but most people enjoy exploring interests that they did not previously have time to. There are several downsides to retiring early, such as missing out on opportunities to save more money, but you will need to make sure you are not delaying retirement for a reason that does not benefit you in the long run.