Retirement is the single largest savings goal any one of us faces, and it is all too often neglected because we don’t want to admit there will be a day we cannot work while the nest egg required seems daunting. Here are 11 do’s and don’ts when it comes to planning for retirement.
Retirement Planning Do’s
Do determine how much you can contribute to tax advantaged retirement plans:
You can contribute more to a 403B than the average 401K. If you’re approaching middle age, find out if you can take advantage of catch up provisions that let you put even more into the retirement plan. 403B plans have a unique provision that lets you contribute extra if you’ve worked for the entity for 15 years or more, even if you’re in your mid-thirties. Conversely, you want to be careful of putting extra taxable money into a 401K or 403B that makes tracking the retirement account more complicated than it needs to be.
Do contribute to tax advantaged retirement accounts first:
If you’re deciding where to allocate your retirement savings, put money into the 403B or 401K first since this reduces your taxable income and usually comes with employer matching. Look at the employer matching as free money. Suppose your employer only contributes a 2% match when you put in 6% of your own money – that is an immediate 33% return on your money. If you contribute 4% and they match 4%, you’ve doubled your money and received 100% ROI simply for contributing the money.
Note that if you are contributing to a retirement account, you can count this employer match toward the 15% of income saved for retirement you need in order to generate an equivalent stream of income in thirty years of retirement as you earned throughout your working life.
Do investigate your options before you put your money in the retirement plan the Human Resources presentation lists first:
Use a 403b calculator to determine the tax benefits and impact on your paycheck if you contribute to the 403B’s tax deferred option or if you contribute to the Roth option. In the case of the Roth, you’re paying taxes on the money now, but won’t pay income taxes on it when you retire. This is particularly attractive if you expect taxes to go up in the future or to end up in an equally high tax bracket upon retirement.
Do determine what you need to save overall to fund the expected income you’ll need each year in retirement:
Use a 403b calculator to determine how much you must contribute each year on average to reach that goal. Don’t assume you’ll save more later when you’ll have to save even more each year you wait to start contributing. Don’t worry about saving too much for retirement, since this provides a financial cushion if you live longer or have higher than expected medical costs in retirement. In the “worst case scenario”, you have so much saved that you don’t need to contribute to retirement in the final years before you do retire. A good rule of thumb is to assume you’ll pull out 4% per year of the account’s value.
If you want to go on a dream vacation when you retire or just be able to afford your monthly bills with a little more of a financial cushion, a reverse mortgage can help. However, you should obtain a reverse mortgage specifically, if you want to avoid repayment and potential default concerns. A reverse mortgage calculator tool or lender can help you figure out how much of your home's value you can borrow from. By borrowing through a reverse loan instead of a standard one, only long-term repayment will be a concern. No monthly restitution will be required on your part. You will have the security of continued home ownership and freedom to spend your money on anything you want. However, you will be obligated to allow the sale of your home or pay the full remaining loan balance if you ever stop living in the home.
Retirement Planning Don’ts
Don’t invest in government bonds in your 401K, IRA or 403B plan:
Government bonds barely pay more than the rate of inflation, and the point of investing for retirement is to receive far more than the rate of inflation. Don’t buy gold or precious metals, either, since they don’t yield a return on investment and historically return less than government bonds.
Don’t invest in annuities within your tax sheltered retirement account:
Dave Ramsey calls this mistake putting two coats on, putting a tax sheltering “coat” over the money when you already have one protecting the money called the 401K, 403B or traditional IRA. Only use the annuity to protect money outside of these types of tax sheltered accounts.
Don’t day trade in your retirement account:
While you won’t pay taxes on the profits, you’re too likely to gamble in the name of investing and hurt your overall returns. And don’t buy company stock in your retirement account, even if the company gives you a discount. You’re already reliant on them for your income. Diversify and buy other stocks, bonds, mutual funds, or real estate investment trusts.
Don’t borrow against your 401K or 403B:
While some financial advisers call this borrowing against yourself, the end result is that the funds are pulled out of the stock market and aren’t growing while you pay back this loan. Compounding the risk is the fact that you have to pay the loan back if you lose your job or pay taxes plus a ten percent penalty on the loan amount.
Don’t assume that a retirement plan through a government entity or nonprofit is going to have your best interests at heart:
Far too many 403B plans come with high fees because they didn’t shop around, or in the case of small towns, couldn’t afford the lower fees that come with a larger retirement fund. Research whether or not the 403B lets you invest in institutional funds that are otherwise high cost, but compare the fees for other investment options as well.
Don’t assume you can work as long as you want:
A large percentage of those who take early retirement do so for health reasons that prevent them from working. If you are able to start up a small business or monetize a hobby in retirement, realize it is unlikely to do more than take up your time. This is why the average income for an antique shop is a thousand dollars a year; many retirees run one because it was their dream, but they aren’t making a profit from it because that doesn’t really matter.
Don’t expect to use Medicaid to cover your nursing home costs:
The government’s claw-back provisions are getting tighter with public approval because it is unfair to expect everyone else to pay for your nursing home care so that your kids can get your house.
If you want your retirement years to be as comfortable as possible, keep this advice in mind.