By Bennett C. Whitlock III
The most important goal for many of my clients is to retire on their terms. This often means planning a long, secure retirement that enables them to check off items on their ultimate bucket list. Retirement requires careful planning in addition to avoiding financial missteps along the way. Here are five common mistakes and strategies to avoid them.
Pushing retirement planning into the future. Preparing for retirement can be overwhelming, so it’s easy to think, “I’ll tackle it next year.” Simply put, the earlier you start focusing on retirement, the earlier you can prepare a plan that accounts for your goals and concerns. And, focusing on saving today gives your investments the opportunity to snowball in value through the power of compound interest.
Underestimating the cost of health care. Medical costs are rising, with no clear end in sight. Your best defense is to figure out what protection and sources of income you could apply toward potential medical expenses. Common vehicles include Medicare and supplemental insurance premiums, long-term care policies, continuing health insurance through an employer and health savings accounts. Know which policies cover various expenses, and stay familiar with the amount of your deductibles, co-pays and out-of-pocket maximums.
Ignoring the impact of taxes. Predicting your tax bill in retirement can be complicated, but it’s worth the effort. Retirement income for many retirees comes from a variety of taxable and non-taxable sources. Your tax rate will be based only on your taxable income, so it’s important to know and manage the tax treatment of your retirement paycheck. When you turn age 70 ½, you are required to take a minimum distribution from your traditional IRA. This money is generally taxable. If you don’t need the money and want to avoid the resulting tax bill, consider transferring your distribution (up to $100,000) directly from your IRA to a qualified charitable organization. A tax professional can help you determine the strategy that’s right for your situation.
Using your 401(k) savings for other expenses. Before you tap your retirement savings early, think through the consequences. IRS rules allow investors to withdraw 401(k) savings for qualified expenses (non-qualified items trigger a 10 percent penalty). But just because you can, doesn’t mean you should. Removing money from an income-bearing account reduces the long-term growth potential you can earn through continued saving and compound interest.
Downplaying the importance of estate planning. A well-rounded retirement plan includes documenting your wishes for how you want your affairs handled if you become incapacitated or when you pass away. Creating (or updating) your estate plan enables you to help minimize any estate or inheritance tax for your beneficiaries and add in other specifications that help your assets transfer smoothly to the next generation.
Time is on your side when you start preparing early. Tackling one step at a time is a great way to make progress on your retirement plan and avoid potentially costly missteps. If you want a second opinion, engage a financial advisor who can review your situation in detail.
Bennett C. Whitlock III, CRPC®, is a Private Wealth Advisor and Managing Director with Whitlock Wealth Management, a private wealth advisory practice of Ameriprise Financial Services, Inc. He offers fee-based financial planning and asset management strategies and has been in practice for 22 years. To contact him call 703.492.7732 or visit his website at whitlockwealth.com. 12848 Harbor Dr., Suite 101 Lake Ridge, VA 22192.
Ameriprise Financial Services, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Investment advisory products and services are made available through Ameriprise Financial Services, Inc., a registered investment adviser.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.