There are so many variables when it comes to retirement planning that it can be easy to make some mistakes along the way. That’s why it’s so important to have a plan you can refer to if you ever find that you’re getting off track.
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But even if you’ve already automated your savings and maxed out your retirement plans, there are some acts of both commission and omission that can derail your strategy. Here’s a look at the most common retirement mistakes that the middle class keeps making, along with suggestions on how to avoid them.
Probably the biggest single killer when it comes to retirement plans is withdrawing from them prematurely. Far too many people view a retirement plan as an emergency fund, and when they draw from it early, it has a devastating effect on their long-term savings.
For starters, most premature withdrawals from retirement plans come with a 10% penalty, in addition to ordinary income taxes. If you’re in the top bracket, the combined hit could reach 47%. And that’s before you even factor in state taxes.
Even worse, many people don’t use their retirement withdrawals to pay their penalties and taxes. It’s not until tax time rolls around that they realize they have a $2,000 to $5,000 bill waiting for them.
Withdrawals of contributions from a Roth IRA are tax-free. However, the other major problem with taking money out of a retirement plan early is that you’re foregoing your savings, along with all the compound interest they would generate.
Imagine that you’re 30 years old, for example, and you withdraw $10,000 from your IRA. By the time you are 65, assuming an 8% average annual return, that $10,000 would have grown to about $163,000 (using Dave Ramsey’s Investment Calculator). If you don’t replace that money in your retirement account, what might seem like a relatively small withdrawal could actually cost your nest egg hundreds of thousands of dollars.
Resolution: The key here is to avoid taking premature retirement withdrawals at any cost.
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Inflation is an unavoidable part of daily life. While most Americans have felt the pain of rising costs over the past few years, many overlook planning for inflation in their retirement.
Imagine, for example, that you anticipate drawing $50,000 from your retirement account every year to pay your bills. Even at a relatively modest 3% inflation rate, in 10 years, you’ll need $67,195 to fund the same lifestyle. In 20 years, that number will jump to $90,305 — almost double the original amount.
