March 13, 2020
The Federal Reserve Board reports that only 40% of Americans can cover an unexpected $400 expense, showing just how challenging saving has become for many Americans. Unfortunately, in terms of retirement, saving is the name of the game. Here are five mistakes that, depending where you are on your path, can be avoided!
1. Delaying Saving
The sooner you start saving, the better! For compound interest and the stock market to work its magic on your principal balance, time is a necessity. If you haven’t been able to save as much as you would like, it is always better to start saving in earnest late than never of course, and there are federal catch-up provisions that let people 50 years old and older contribute more than the typical federal limit.
The National Endowment for Financial Education gives a concrete example to show the importance of saving earlier rather than later in life:
Someone who saves $1,000 a year in an IRA for only nine years, from ages 22 to 31, would see that money grow to $243,865 by age 65, assuming a 9 percent interest rate. A person who saved $1,000 a year for 34 years, from ages 31 to 65, with the same interest rate, would have only $196,982 at age 65.
2. Under-utilizing Employer Retirement Plans
Many companies offer their employees a 401(k) Contribution Match, often up to 3% of their annual income. By not contributing to your 401(k), assuming you made $65,000 per year, you would be leaving nearly $2,000 on the table every year! Additionally, those 401(k) contributions are deducted from your paycheck pre-tax (for traditional 401(k)’s at least) which can help lower your taxable income and therefore your tax bill- which means more money in your pocket! I mean, in your savings account—right?
3. Health is Wealth
Generally speaking, a healthy lifestyle is the most important investment you can make in yourself. Not only does it help you enjoy life and keep you able to stay working (and saving!) longer, it helps avoid and minimize future health risks. With the ever-increasing cost of health care as well as long term care, the longer you can stay healthy the more you will save!
4. Not Planning for Retirement
A large part of retirement planning is figuring out what your retirement expenses will be. A retirement expense calculator can help you figure out what those costs may look like, and help you judge how well your planned retirement income and savings will cover those costs. And as we mentioned, long term care can be a wrinkle that catch many families by surprise. As many as 70% of retirees will require long term care at some point, and costs associated with that care are steadily on the rise.
5. Lapsing a Life Insurance Policy Prematurely
When there is a retirement planning shortfall many retirees look at where they can reduce costs, and in most cases the life insurance policy is one of the first asset to be let go. For many in this position, while the life policy is an asset the premiums are becoming more of a burden, and the need for keeping the life insurance policy seems to be diminishing (the kids are grown, etc.). What most people facing this dilemma don’t know is that you can sell a life insurance policy that you own instead of lapsing or surrendering the policy back to the insurance company. In a transaction known as a life settlement, you can sell your life policy to an investor for a cash payment of an amount less than the death benefit but greater than the surrender value (if there is any). This is a regulated transaction at the state level, so be sure to speak with a licensed life settlement broker or provider if you would like to explore selling a policy you own!