Will you retire comfortably? How much you're looking forward to it could come down to how prepared you are.
So that important question may have you either excited or nervous. And the way that you answer it may depend on how well you avoid doing these four things.
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1. Not saving enough
Experts agree that you'll need about 80% of your pre-retirement wages for your expenses in retirement. But when you retire, you will no longer have an income from working. Instead, if you qualify, you will have Social Security. That probably won't be enough for all of your needs, however, and living the life you want in retirement will require finding other ways of generating that income.
For many, this will be done with retirement savings accumulated over years. You can see an example of how you can determine your retirement savings needs below.
- Start with your working salary: $87,500.
- Take 80% of that: $87,500 times 0.80 = $70,000 needed in retirement.
- Social Security for the average individual will make up about 40% of your working income: $70,000 times 0.40 = $28,000.
- Subtract your Social Security payment from your income needs in retirement: $70,000 minus $28,000 = $42,000 a year.
Studies have shown that if you have a portfolio made up of 60% stocks and 40% bonds, withdrawing no more than 4% can help you avoid running out of money. And if you need $42,000 from your retirement accounts, you can accomplish this with a beginning balance of $1 million in your first year of retirement.
2. Investing too conservatively
The more you earn on average, the lower your contributions could be. But you should not invest based solely on this. If you invest too aggressively, your accounts could experience quite a bit of volatility, which (depending on your risk tolerance) might be too much. But doing the exact opposite -- investing too conservatively -- could also make meeting your goals harder.
The table below illustrates the annual amount needed for accumulating $1 million in 30 years given different rates of return. You would've earned about 10% on average between the years of 1926 and 2020 if you were 100% invested in stocks, 6% if you owned 100% bonds, and 8% if you put 40% into stocks and 60% into bonds.
| Rate of Return | Amount Needed Annually for $1 Million |
|---|---|
| 6% | $12,000 |
| 8% | $8,500 |
| 10% | 6,000 |
Calculations by author.
3. Taking Social Security too early
If you begin taking Social Security at your full retirement age (FRA), you will get your standard monthly benefit. But you can take it as early as age 62 and as late as 70. If you take it early, you will get a decrease in your benefit for every year that you take it sooner. And if you take it late, you will get an increase in your benefit for every year that you delay.
There is no right or wrong answer on the best time to take it, but there could be the best time for you. And that optimal time depends on how long you will live. The shorter your life expectancy, the more sense it makes to begin taking it early, while if you have an average life expectancy of about 80, taking it at your FRA may work out best, and if you think you could live a longer life, delaying it may work out best.
The table below shows how big a difference life expectancy can make if you have a standard benefit of $2,700, a reduced benefit of $2,025, and a delayed benefit of $3,564.
| Claim at 62 | Claim at 66 | Claim at 70 | |
|---|---|---|---|
| Live to 75 | $315,900 | $291,600 | $213,840 |
| Live to 80 | $437,400 | $453,600 | $427,680 |
| Live to 85 | $558,900 | $615,600 | $641,520 |
Calculations by author.
4. Dipping into your retirement nest egg
If you've saved a considerable nest egg for retirement, you might be tempted to tap into it for an emergency. If you have an IRA, you may have easy access to your money, but it comes at a cost. For any money that you take from your IRA, you will owe taxes. And if you are under 59 1/2, you will also owe a 10% penalty. So if you are 50, and have a 30% marginal tax rate, you could owe 40% on any distribution that you take.
If you have access to a 401(k), getting money can be incredibly easy through a loan. And while you won't owe any taxes or penalties as long as you pay it back, the money that you've borrowed won't be appreciating and growing as long as your loan is outstanding. And while dipping into your retirement savings might fix your short-term problem, it could put you further away from your goal in the long term.
After working for many years, retirement is something that should be exciting! But saving for it can seem intimidating. There are things that can make meeting your retirement but many of them are within your control, and the more planning you put into this process the more these mishaps can be avoided.
