3 Common Money Mistakes to Avoid in Retirement
Have you recently thought about the details of how your nest egg turns into income in retirement? If not, it may be time to do so. There is no magic wand to wave over your savings to turn it into a steady income stream for life in retirement. Although, wouldn't that be nice?
A successful income withdrawal strategy requires planning and coordination of how much to withdraw and when. Gloss over this process and a person could quickly deplete their retirement reserves and be left wondering how to finance their later years.
According to a 2015 Voya Retire Ready Index study conducted by Voya Financial, many people are afraid of running out of money in retirement. Approximately 59 percent of workers surveyed were extremely or very worried about outliving their savings. Having a plan to properly withdraw retirement funds is a critical component to making retirement dollars last.
Here are three common money mistakes to avoid when withdrawing money in retirement, as well as how to increase the chances your hard-earned savings will last longer.
1. Withdrawing money too early. Early retirement: These two words bring joy to many, but are your savings ready to handle the extra years of retirement? If you do have the opportunity to retire early, consider what it will cost to access retirement funds early. On average, retirement account distributions are assessed a 30 percent mandatory withholding -- 20 percent as a prepayment for federal income taxes and a 10 percent penalty for withdrawing funds before you turn 59½. Ouch.
In addition, don't forget that the Social Security benefits retirees receive from the ages of 62 to 66 are a fraction of what they would receive if they waited until full retirement age or later. Reconsider early retirement or explore other ways to finance early retirement besides dipping into retirement savings. Interestingly, a surprising number of people do not retire early by choice. The same Voya Financial study found that 60 percent of retirees had a very or somewhat unexpected retirement.
Whether by choice or necessity, if early retirement is in the cards for you, consider other funding options such as tapping investments not intended for retirement, taking on a part-time job or downsizing your lifestyle. Also, try to speak with a financial planner or tax professional for help in considering all of your financial options.
2. Withdrawing money too late. At some point, Uncle Sam will demand that taxes be paid, and there is no avoiding that reality once a person turns 70½. Retirees with pretax retirement accounts face a 50 percent tax if they wait too long to withdraw retirement income. There is a stiff tax penalty for not withdrawing funds and it can be a big blow to your bottom line. Whether the cash flow is needed or not, the required minimum distribution starting at age 70½ must be taken from pretax retirement accounts.
Ahead of time, develop a plan to begin withdrawing from pretax accounts to help avoid these tax penalties. You'll probably want to consider reallocating and judiciously reinvesting funds if they are not needed for income.
3. Earning too much money in retirement. There are strict rules when it comes to drawing on Social Security and having a part-time job in retirement. Not knowing those rules could cost you as much as half of your paycheck from an employer. The U.S. government considers full retirement age for many people to be 66.
If you are younger than full retirement age, there is a limit as to how much money you can earn and still receive full Social Security benefits. For 2015, that limit is $15,720. If a person is under the full retirement age, for every $2 earned above that limit, the government will deduct $1 from the Social Security payment. Quite simply, this means that money is lost and can never be regained.
A comfortable retirement is the reward you receive after a lifetime of planning and hard work. Retirees shortchange themselves by making money mistakes that could easily be avoided. Long before filing the retirement paperwork, make a plan for a thoughtful retirement income withdrawal strategy to help maximize your income in retirement.
Securities and Investment advisory services offered through Voya Financial Advisors Inc (member SIPC). Jacob Gold & Associates Inc. is not a subsidiary of nor controlled by Voya Financial Advisors.
Jacob Gold is a Voya Retirement Coach, a third-generation financial advisor and President of Jacob Gold & Associates Inc. He is the author of the upcoming book, "Money Mindset: Formulating a Wealth Strategy for the 21st Century" and "Financial Intelligence: Getting Back to Basics after an Economic Meltdown," which was published in August 2009. Gold is a certified financial planner practitioner and is Series 7, 24 and 66 securities registered.
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