Retirement killers are the things that can destroy your plans for a lovely, comfortable retirement. There are things you can do before and during retirement to defend yourself against the retirement killers. Here are the 5 biggest risks to your retirement and how to avoid them.
Are you the type to withdraw money from a 401(k) or individual retirement account before retirement age? Maybe you change jobs often and have cashed out more than once. Control that itchy trigger finger! Your money is like fine wine, it gets better as it ages. If you withdraw your retirement funds early, you don't just miss a few years of savings, you also miss out on years of compounded growth. And as much as you may need it the money today, think how much you will need it in retirement when your income has stopped.
What you can do now: Instead of cashing out, get a Rollover IRA. A Rollover IRA is an account that lets you consolidate other retirement accounts without tax consequences or penalties. If you are tempted, calculate what the taxes and penalties of an early withdrawal will be. It final total may not be worth it to you at this point. Still tempted? Consider a 401(k) loan if one is offered by your employer.
2. A Long Life
According to the Social Security Administration, about one out of every four 65-year-olds today will live past age 90. One out of 10 will live past age 95. Now consider how long today's 25-year-olds will live and you see how retirement at age 65 may not make sense for many of us. So your first consideration is retirement age. Do you need to retire in your 60s or do you simply need a career change? Starting a small business, taking on consultancy work, or just trading your full-time job for a part-time one is just the thing you need to revitalize this stage in your life.
What you can do now: Your chances of outspending your savings lessen if you live a long and healthy life, so do what you can now to reduce your healthcare costs in retirement. Save as much as you can in your tax-deferred retirement accounts while you are still working and earning income so you have more savings to tap. When it's time to retire, develop a conservative 401(k) and IRA distribution plan that allows you to make the most of your income and your investments.
No matter how much you save, too much debt will impact your retirement lifestyle. Plus, if you are spending beyond your means today you will be unprepared to live on a reduced income in retirement.
What you can do now: Regardless of your age, you can develop a plan that will help you get out of debt. If you have good standing with your credit card issuer, you may be able to negotiate a lower rate, or consolidate your debt at low or no interest. Aim to pay more than the minimum balance each month. But debt should not trump your retirement savings plan. Both are important to your financial well-being.
When you are five to 10 years from your planned retirement, it's a good idea to live on a budget to prepare yourself for a retirement lifestyle.
You don't have to be the type of loud mouth who talks incessantly about his portfolio at cocktail parties to be a successful retirement investor. You could do just fine (or even do really well) in the market without ever watching Mad Money or reading a copy of Smart Money, as long as you have created an asset allocation and rebalancing plan for your own money. That plan may change over time with your risk tolerance, especially as you are within five to 10 years of your retirement. At that point, many investors shift additional assets into more liquid or cash-like investments, to cover any gaps in income that may occur as you transition to retirement. Otherwise, make a date to check in with your portfolio periodically and ignore it the rest of the time.
What you can do now: Determine your risk tolerance and get to know the investments within your retirement plan. You can have an elaborate asset allocation or a simple one, as long as you have considered your risk and your goals and have built a plan you can live with.
Some people think of retirement as the time to start living your dreams. Maybe so, but you still have to do it on a budget. Many financial professionals agree that taking 4% a year from your portfolio can sustain your income needs in the short and the long term. What does 4% look like for you? What would it look like if you spent a big portion of your savings today and had to live on 4% of the rest? If you eat away at your savings early on, it can quickly put your long-term plan out of whack.
What you can do now: Tune out the Joneses and practice living a sustainable lifestyle. Make financial common sense a part of your personality, kind of like your grandmother did.
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