When you’re close to retiring or have already retired, you want to protect everything you’ve worked so hard for. While some factors, including market fluctuations, are beyond your control, some actions can cause your nest egg to dwindle.
Here are a few ways to get into retirement trouble:
Ignoring Your Long-Term Strategy
It’s easy to get seduced by the allure of active markets and high returns. However, a long-term approach is considerably more appropriate for someone planning for retirement. Every day, the needs vary, and attempting to time them may cost you additional stress and possibly harm your finances. To avoid this trap, develop an investment philosophy based on your goals, personality, and risk tolerance. Then stick to it, regardless of what happens in the markets or the headlines.
According to a Dalbar study from 2015, when playing the market results in underperformance. In a panic, buying high and selling cheap diminishes your overall return and jeopardizes your retirement. Instead, what should you be concentrating on, refusing to ride the market roller coaster, and maintaining a long-term view and disciplined approach?
Borrowing from Your Retirement Savings
It happens more frequently than you may believe. According to the Transamerica Center for Retirement Studies, 23% of those questioned used their retirement savings to cover an unexpected bill.
In two ways, this conduct can lead to a reduction in retirement savings.
If you take out a 401(k) loan, the interest is taxed twice. While any money borrowed is tax-free, the interest on the loan is paid with after-tax dollars.
You are taxed again when you withdraw funds in retirement. You must also repay the loan within 60 days if you leave your employment or are dismissed, regardless of the borrowed amount. If you don’t, you’ll be subject to income tax and a 10% penalty if your income is less than $5,912. Except for specified conditions, early withdrawals from a traditional IRA are subject to a 10% penalty and taxes. Roth IRAs provide additional flexibility and allow you to withdraw contributions tax-free, but they come with long-term costs.
Second, and most significantly, when you take money out of your retirement account to pay off a debt or cover an obligation, you forfeit the opportunity for growth and compound interest.
Depending on your age, you may never be able to replenish your funds. Create an emergency savings account instead and tell yourself that your retirement funds are off-limits. While it may appear easy to use your retirement money in this manner, you are robbing your future retirement.
Failing to Take Required Minimum Distributions
If you reach the age of 7012, you must begin taking RMDs from your traditional IRA and employer-sponsored retirement accounts. You must follow the RMD guidelines regardless of whether you need the money when you reach this age. What happens if you don’t stick to your word? The IRS will charge you a 50% penalty for excess accumulation! It might drastically reduce your retirement funds. If you are obligated to withdraw $5,000 and do not, you will be responsible for $2,500. That was an unnecessary loss. To make matters worse, if you don’t have enough money in an emergency fund to cover the penalty, you may be forced to utilize your retirement funds to protect it, severely jeopardizing your financial future.
All your eggs in one basket
For this reason, diversification is one of the most widely discussed financial strategies. It safeguards your money from market fluctuations. While you can’t eliminate risk from your portfolio, you can mitigate the impact if things go wrong. You risk losing your retirement savings if you invest too much of your money in one stock or one sector of the economy. Combine that with global exposure, alternative assets, and a stock-light portfolio. Examine the overall picture of all your accounts, including those sponsored by your employer, and make sure you’re well-diversified.
If you don’t work with a reputable financial advisor, you could jeopardize your money. An adviser can assist you in sticking to a long-term goal, managing emotions, and providing invaluable assistance and advice. Our number one mission as independent financial advisors specializes in guiding people through their Second Growth phase of life, a time of protecting, building, and transferring money. It is to provide you peace of mind and the guarantee that you will meet your retirement needs. Contact one of our locations now for a friendly consultation to take the first step in preserving your hard-earned retirement resources.About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.