Whether you're planning to retire in a couple of years or a couple of decades, the moves you make in the near term could influence your lifestyle down the line. With that in mind, here are four big retirement-planning mistakes to avoid next year at all costs.
1. Not contributing to a tax-advantaged retirement account
There's a reason it pays to save for retirement in an IRA or 401(k) plan, as opposed to sticking your money in a regular old savings account or even a traditional brokerage account. Both IRAs and 401(k)s offer a number of tax advantages that make them a more sensible option than their non-tax-advantaged counterparts.
If you save in a traditional IRA or 401(k), the money you contribute goes in on a pre-tax basis, and any growth on your investments is tax-deferred. That means that unlike with a traditional brokerage account, you don't pay taxes on your investment gains year after year. Rather, you get to reinvest those gains in full to further fuel your savings' growth. The only time you pay taxes with a traditional IRA or 401(k) is when you actually take withdrawals.
Meanwhile, Roth IRAs and 401(k)s work the opposite way: Contributions are made with after-tax dollars, but once that money is in your account, it gets to grow completely tax-free. Withdrawals are then taken tax-free in retirement, giving you a larger income stream when you're older.
Now the one catch is that you can't access your traditional IRA or 401(k) prematurely without incurring penalties; any funds you remove before age 59 1/2 are subject to an automatic 10% penalty unless you qualify for an exception. But that restriction is well worth the tax benefits you'll reap.
2. Not making catch-up contributions
Beginning in 2019, workers under 50 will be allowed to contribute up to $6,000 a year to an IRA and $19,000 to a 401(k). If you're 50 or over at that point, however, you'll have the option to make a $1,000 IRA catch-up or a $6,000 catch-up to your 401(k), thereby increasing those limits to $7,000 and $25,000, respectively.
If you're behind on savings, taking advantage of those catch-ups could spell the difference between living comfortably in retirement and struggling down the line. Imagine you're 57 years old with a mere $20,000 in your 401(k), and you want to retire at 67. If you contribute $19,000 a year over the next 10 years, and your investments deliver a 7% average annual return during that time, you'll wind up with $302,000 to work with. But if you max out your 401(k) for 10 years at $25,000 instead, you'll end up with $385,000, assuming that same return. And make no mistake about it: That extra $83,000 will come in very handy when you're older.
3. Not reviewing your Social Security earnings statement
Your Social Security benefits will be calculated based on your top 35 years of earnings coupled with the age at which you initially file. But if the Social Security Administration (SSA) has inaccurate information about your earnings history on file, your benefits could end up taking a hit. That's why you must regularly review your earnings statements from the SSA and take steps to correct any errors you spot.
For example, if you earned $80,000 in 2017, but the SSA shows no earnings on file, that could significantly impact your benefits, so the sooner you provide the SSA with pay stubs and other evidence of your income and associated Social Security taxes, the better. Keep in mind that you won't get those earnings statements in the mail unless you're 60 or older. If you're under 60, you'll need to log onto the SSA website and access them yourself.
4. Not requesting a raise
Earning less money next year won't just affect your quality of life between January and December; it could also affect your retirement income. For one thing, the less you earn, the harder it will be to max out or contribute heavily to your IRA or 401(k). Secondly, a lower salary could translate into lower Social Security benefits since, as we just learned, those payments are earnings-based.
That's why you must ask for a raise in 2019 if you feel you're being underpaid or haven't gotten a boost in quite some time. You'll increase your chances of success if you go into that conversation armed with salary data (which you can dig up online) that proves you deserve to be earning more. At the same time, be prepared to provide specific examples of the ways you add value to your company so that your managed is motivated to advocate on your behalf.
The moves you make next year could affect your retirement for the better. Avoid these mistakes, and you'll be in a better place financially when your golden years roll around.