With all the planning we need to do for retirement, wouldn’t it be great if we could call up a retirement planner?
Unfortunately, “retirement planners” don’t exist. What do exist, however, are certified financial planners, who can help you with your retirement planning.
And they’re happy to share their wisdom. In fact, we picked the brains of two experienced CFPs to find out some of the most common mistakes their clients make—so you don’t have to.
Read this and you can check off “Get retirement right!” from your to-do list.
1. Operating Without a Goal
Estimating how much money you need to save can be tricky … but that doesn’t mean you should go in blind. After all, that’s a real recipe for disaster. Katie Brewer, CFP with LearnVest Planning Services, says that she sees many people saving for retirement without any particular goal in mind, which can keep them behind schedule and coming up way short when it’s time to quit your day job.
To estimate how much money you’ll need after you stop working, Brewer points to a figure called the “replacement ratio“—that is, how much of your income you need to “replace” for each year you’re retired. “For a financially secure retirement, meaning you’re neither on a tight budget nor are you splurging on cruises and five-star restaurants, we recommend planning to replace 70% of your former income—though that figure can vary based on your overall financial picture,” Brewer explains.
If you’re the type who’s going to drastically reduce your living expenses and keep yourself on a tight rein once you retire, you could probably make do with about 60%, again depending on your individual circumstances, she says. And if you want to live just as you’re living—plus some amazing round-the-world trips, you should estimate saving enough to replace about 80% to 100% of your former income.
From there, work backward: How much do you need to save now to get there? Many brokerages offering retirement plans have calculators right on their websites, says Brewer, or you can use free calculators through sites such as FINRA and Bankrate, which allow you to plug in facts like how long you have until retirement and show how much your savings could grow in that time. While those calculators can help you with a rough estimate, you may want to work with a financial planner to make sure you’re on track.
OK, we get it: It’s nice outside. You’ve got years to go. Nobody but the fictive retirement planners really wants to think about retirement at all. But when it comes to saving for it, there’s no bigger advantage than starting early.
Brewer works with a lot of people who put off saving for the future like any other chore: “I’ll do it after I get a promotion,” “after I’m earning more,” or “after I’ve made a bigger dent in my student loans,” they tell her. “But when you keep putting it off, it’s all too easy to get to retirement and find out you don’t have nearly enough saved,” she cautions.
She recommends opening an account as soon as possible and setting up an automatic contribution from your paycheck, no matter how small. “Even if you can only contribute 1% for now—that won’t get you to retirement, but it will get you closer than you are today,” Brewer explains. To make sure you continue increasing your contributions, she suggests setting a monthly, biannual or annual calendar reminder to up what you’re contributing by another percentage point … or two. (Sometimes, you can even automate this through your retirement plan.) “You don’t want to realize five years before you plan to retire that you’re behind on your goal,” she points out. “Putting away 10% now will be a lot less painful than putting away 50% later.”
3. Approaching Retirement With Outsized Home Costs
Entering retirement with a mortgage isn’t necessarily a bad thing. Entering retirement with a mortgage—or even a home equity loan—you can’t afford, however, is a potential disaster.
“I see people with too much in real estate debt, which is quite often a HELOC on top of a mortgage,” says Judy McNary, CFP® with Colorado-based McNary Financial Planning, referring to a home equity line of credit, which lets homeowners borrow against their home’s equity.
She points out that a certain amount of debt is manageable—even good—but massive debts such as HELOCs tend to make covering your retirement costs tricky, as retirees with this much debt need to set aside much more money than someone who has paid off their major loans to pay down their housing costs.
For that reason, McNary recommends prioritizing pre-retirement repayment of that debt. “If a client can pay off the home equity line, it generally will get them to a state of debt they can support with what they want to live on in retirement,” she says.
4. Being Unaware of Whether You Have Employer Match Some employers offer what’s called “matching,” where they match a percentage of the amount you contribute to your employer-sponsored retirement plan. Essentially, your employer is paying you to make a smart financial move. If they offer this incentive and you’re not taking advantage—perhaps because you don’t even know it’s an option—you’re giving up free money.
“If your plan does have a match and you’re unaware, you’ll be kicking yourself in five years,” cautions Brewer. “And it’s easy to find out if it does—just check out the website for your plan, or, if you really can’t find it, email the person who manages the plans for your company. They’ll be able to tell you, so you can get on board.” When starting a new job, you’ll want to ask whether you have employer match immediately, and how soon it’s available, so you can get enrolled right away.
5. Choosing the Wrong Tax Strategy
In the case of retirement savings, you’re going to have to pay taxes—and it’s generally smarter to pay now than later. That’s because, with post-tax contributions—in other words, paying now—you pay taxes on the amounts you contribute today. With pre-tax contributions, or paying later, you pay taxes when you take that money out years down the road … plus more tax on the interest it’s earned.
“Roth IRAs are post-tax vehicles,” explains Brewer, “but they do have an income limit, so not everyone qualifies. Roth 401(k)s, however, don’t have an income limit.” Many big companies offer Roth 401(k)s in addition to or instead of standard 401(k)s, so it’s in your best interest to ask your plan provider or HR representative if your employer is one of them. “To make sure you have both taxable and tax-free buckets of money in retirement, make sure you have both pre-tax (traditional IRA or 401(k)) and Roth contributions,” recommends Brewer.
If you don’t know whether the Roth 401(k) is right for you, we may be able to help you decide.
6. Neglecting to Consolidate Your Accounts
Quick: Where are your retirement accounts? Over the course of a long career (or even a short career with multiple employers), there’s a good chance you’ve set up multiple 401(k)s and IRAs. But as we move on, too many of us forget to pack up our retirement contributions along with our desk plant.
If you’re leaving money behind and forgetting about it, you’re not only stalling the progress you’ve made toward retirement, you may even be losing money. “Not only is it a case of people forgetting where their money is or how to access it,” Brewer explains, “but other things can happen as well, like your former employer changing your investments and notifying you at the out-of-date address they have on file … so you never find out.”
The solution? Rolling over your accounts, which is industry-speak for consolidating your multiple retirement accounts into one place. It’s a simple matter of paperwork (called “distribution paperwork”), which allows you to “roll” your previous contributions into a private IRA or a 401(k) with a new employer. This process is a little different at every company, so you’ll need to call the company holding the account(s) you want to consolidate and ask how to proceed.
For more information on whether or not you should roll over your previous accounts and whether you should roll into an IRA or 401(k), see our article: When Should I Roll Over My 401(k)?
7. Putting Your Kids Before Your Retirement
Every parent wants what’s best for their kids—but when that comes at the expense of their retirement fund, they may need to find other ways to help. McNary sees clients putting their own savings on hold to help out their children with large expenses such as college or rent, which can set their retirement savings back by years.
As a parent of three young adults, McNary understands the conflict. “It’s a tricky subject, but the most important thing you can do for your kids is make sure you’re self-sufficient, so you won’t have to rely on them in your eighties for financial support,” she explains. Instead of giving into the urge to write a check for your kids, McNary recommends that young adults take ownership of their decisions to find a home or a school within budget. “It pains me when I see parents, whose intentions are awesome, not maximize their retirement opportunities because they want their children to be successful,” she says. “There needs to be balance.”