The last couple of decades have seen a number of changes, technologically, economically, or Planning a Funding for Retirement. Pagers and cassette tapes bowed out in favor of smartphones and streaming services, for example. Many employers have also moved away from distinct pension payments to 401(k) s. This has become the norm rather than an emerging trend and is likely here to stay. Ideally, you should be funding your retirement plan using Social Security, your employer’s retirement plan, investments, and your own personal savings. While it sounds simple in theory, there are a lot of ways this could go wrong. Hence we would like to draw your attention to a few important issues so that you can avoid some common mistakes when funding your retirement.
Avoid Some Common Mistakes When Funding Your Retirement
The transition to 401(k) plans is not a bad thing at all, but it shifts the onus of saving for retirement onto the employee rather than the employer. You will be expected to set up a contribution plan that will fund your retirement and help you attain your post-retirement goals. The shifted responsibility makes it imperative that all employees understand what the plan entails, what impact it will have on their future and how they can start working on retirement plans right away. You could be missing out on a lot if you do not fully understand your employee benefits.
#1 Poor Estimation
Your lifestyle post-retirement will not be the way it is now. You will need to understand what your needs and expectations will be in those non-working years and then further figure out how much you would need in your account to support these goals. The US Department of Labor believes that about 80% of pre-tax income is a pretty good figure to have in your 401(k). You might not need as much, or you might need more, but having this as a ballpark figure will definitely get you further along the way to reaching your perfect replacement ratio. You need to have all these things worked out and set in stone to ensure you stay on track.
#2 Not Saving Enough
This is also a very common mistake among professionals- they do not think about retirement until it is too late to, or they do not give it as much importance as they should be. To counteract this at least to a certain extent, a number of employers have put automatic enrollment systems in place for their employees. This has naturally led to increased participation, but the amount put aside through that process is probably not going to be enough to fulfill your personal goals. A typical contribution is anywhere between 3% and 6%. Even with the employer matching the contributions, it is likely not going to be good enough. Your average savings goal should be 15% of your income, as per TIAA. If you add more funds early in the cycle, the compounded growth will be more effective, thus eliminating the need to put in large amounts into savings later in your life.
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A very simple but effective action you can take is to ensure that you are maximizing the company match. There are a number of formulas employed for this, some of the typical ones being a straight-up match up to a certain amount, or split contributions where they pay a dollar for a dollar up to X%, and then a smaller amount for the next portion.
#3 Not Understanding the Options Available to You
When you are joining the company, or early in your career, you should go through the benefits documentation and understand exactly what the structure is. You have three choices to contribute to your 401(k): Roth 401(k), after-tax, and before-tax. They are equally viable and you will have to choose one based on your specific circumstances. That said, there are some things you must keep in mind, such as the return on investment you expect in the future, and also the income tax rates you will have later in your life.
Remember to factor in the tax bracket you will ultimately fall in after retirement so that you know whether you should pay taxes then or now. Market outcomes are also difficult to predict, but a rough estimation should be good enough for you to figure out what kind of ROI you will get on your present investments.
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#4 Not Taking Risks When You Can
Informed risk-taking is the best way to make big bucks in investment. If you don’t take the appropriate risks and make gambles early in your life while you still can, you might end up with as much in your retirement assets as you would like. Find a comfort zone, a level of risk you think you can take, and then make the appropriate allocations. Remember, the higher the risk, the further the oscillation in your assets from a huge kick in case of profit to tremendous deficits and even possible debt reviews to get some help in this regard, as well in case of losses. Too frequent gambling could also end up affecting your credit score, which is definitely not something you want. Re-balance your stock-to-bond ratio based on how your investments perform, as this is the best way to stay on track.
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Definitely do your research, because the target date/risk tolerance funds offered by plans may not be in line with your goals. Sure, it is tiring to go through each individual investment, but it is definitely necessary to ensure your portfolio is implemented in a cost-effective manner. Don’t put all your eggs in one basket. Diversification is the best way to ensure good returns on your investments, even if they do not provide any guarantees. Taking on too much company stock can be risky because it puts a lot of your funds into a single allocation.
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Retirement means you are your own boss and are paid based on decisions you made much, much earlier in your life. If you don’t start early, you might be harming your future, but remember to avoid these critical mistakes so that your naiveté doesn’t come back to harm you. Informed decisions are the key to ensuring a safe, secure, and smooth future. Feel free to speak to friends, family, and financial experts to navigate these situations, because safety is a must, and there’s no better teacher than experience.
Article contributed by: Isabella Rossellini
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