How prepared are you for retirement?
Do you understand the ins and outs of your pension plan (if you’re lucky enough to have one)? How about your 401(k), IRA and other retirement accounts? Do you know when to claim Social Security benefits? These are some of the questions you will have to contemplate. But long before you retire, make sure you’re making the right choices. To help you out, here’s a list of retirement decisions some of you may regret forever.
Claiming Social Security Early
You’re entitled to start taking retirement benefits at 62, but you probably shouldn’t. Most financial planners recommend waiting until your full retirement age – currently 66 and gradually rising to 67 for those born after 1959 – before tapping Social Security. Waiting until age 70 is even better. Let’s say the point at which you would receive 100 percent of your benefits is 66. If you claim at 62, your monthly check will be reduced by 25 percent for the rest of your life. Hold off until age 70 and you’ll get a 32 percent boost in benefits over four years – thanks to delayed retirement credits.
Borrowing from Your 401(k)
Taking a loan from your 401(k) can be tempting. If your plan sponsor permits borrowing, you’ll usually have five years to pay it back with interest.
But short of an emergency, tapping your 401(k) is a bad idea. You’re likely to reduce or suspend contributions during the period you’re repaying the loan. That means short-changing your account for months, sacrificing employer matches and missing out on growth from the missed contributions.
You’ll also pay the interest on that loan with after-tax dollars – then pay taxes on those funds again when retirement rolls around. And if you leave your job, the loan must be paid back within 60 days. Otherwise, it’s considered a distribution and taxed as income.
De-cluttering to the Extreme
Be careful about what you throw out. Sentimental value aside, certain professionals including doctors, dentists, lawyers and accountants can be required by state law to retain records for years after retirement. As for tax records, the IRS generally has three years to initiate an audit, but you might want to hold on to certain records including your actual returns indefinitely. The same goes for records related to the purchase and capital improvement of your home; purchases of stocks and funds in taxable investment accounts; and contributions to retirement accounts (in particular, nondeductible IRA contributions reported on IRS Form 8606). All can be used to determine the correct tax basis on assets to avoid paying more in taxes than you owe.
Putting Your Kids First
You want your children to have the best – best education, best wedding, best everything. But footing the bill for private tuition and lavish nuptials at the expense of your retirement savings could come back to haunt you.
Parents and kids should explore scholarships, grants, student loans, and less expensive schools in lieu of raiding the retirement nest egg.
Another money-saving recommendation: community college for two years then a transfer to a four-year college.
No one plans to go broke in retirement, but it can happen for many reasons. One of the biggest reasons is not saving enough. If you’re not prudent now, you might end up being the one moving into your kid’s basement later.
Buying Into a Time Share
It’s easy to see the appeal of a time-share during retirement. But buyers who don’t grasp the full financial implications of a time-share can quickly come to regret the purchase. In addition to thousands paid up-front, maintenance fees average $660 a year, and special assessments can be levied for renovations.
And good luck if you develop buyer’s remorse. The real estate market is flush with used time-shares, which means you probably won’t get the price you want – if you can sell it at all. And if you find a potential buyer, beware: The time-share market is rife with scammers.
Experts advise owners first to contact their time-share management company about resale options. If that leads nowhere, list your time-share on established websites. Alternatively, hire a reputable broker. If all else fails, look into donating your time-share to charity for the tax write-off.
Avoiding the Stock Market
Shying away from stocks because they seem too risky is a big mistake investors make when saving for retirement. True, the market has plenty of ups and downs, but since 1926, stocks have returned an average of about 10 percent a year. Bonds, CDs and bank accounts don’t come close.
Conventional wisdom may indicate the stock market is “risky” and should be avoided to keep your money safe. However, this comes at the expense of low returns, and you’ve shifted your risk to the possibility of your money not keeping up with inflation.
Look to low-cost mutual funds and exchange-traded funds because they offer an affordable way to own a piece of hundreds or even thousands of companies without having to buy individual stocks.
And don’t retire your stock portfolio once you reach retirement age. Nest eggs need to keep growing to finance a retirement that might last 30 years. You do, however, need to ratchet down risk as you age by gradually reducing your exposure to stocks.
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