A financially successful retirement requires planning both before and after you sail off into the sunset. In fact, the financial steps you take before you retire may be even more important than how you manage your budget during retirement.
After all, if you manage your finances well and build up a sufficient nest egg by the time you retire, your financial choices will be much easier in your golden years.
To put yourself in that enviable position, here are some things you’ll want to avoid doing with your money before you retire.
Cutting Your Retirement Contributions
Your IRA and/or 401(k) plans are the most tax-advantaged ways you can save for retirement. In most cases, you can get a tax deduction for the money you put in, and your account balance grows tax-deferred until you withdraw it.
But you can put money into a retirement plan only when you have earned income. Once you retire or otherwise stop working, your time to beef up your retirement contributions has passed. Cutting your allocations to these accounts before you retire is a mistake that you won’t be able to make up for once you stop working.
Passing Up Catch-Up Contributions
Rather than cutting your contributions to your retirement accounts, most experts will advise you to max them out once you reach age 50. This is because the IRS allows you to make “catch-up” contributions as you approach retirement.
In the case of an IRA, you can put in an additional $1,000 per year once you turn 50, for a total possible contribution of $7,500 as of 2023. For 401(k) plans, the boost is even more significant: an additional $7,500 may be contributed at age 50, for a maximum possible contribution of $30,000.
This extra allowance, when utilized, can have a major impact on your financial success in retirement, and it should be availed if at all possible, rather than avoided.
Draining Your Emergency Fund
If you’re tempted to use up your emergency fund before you retire, that’s usually a mistake. Even if you have a sizable retirement fund in place, financial emergencies still happen.
Without an emergency fund, financial surprises will cause one of two problems. Either you’ll have to drain your nest egg, or you’ll have to go into debt. Neither of those is a way to enjoy a prosperous retirement.
As you may be even more likely to encounter a financial emergency in retirement — such as a medical expense that isn’t covered by Medicare — it’s a good practice to avoid draining your emergency fund before retirement.
While you can never control how markets will perform, there are definitely things you can do to diminish your returns. Actively trading your account, neglecting the tax consequences of your trade, and speculating rather than investing are just a few of the common mistakes that investors make in their accounts.
Successful investing becomes easier as you remain invested longer, so automate your contributions, invest as much as you can for as long as you can, and don’t take any outsized risks with your account as you build your nest egg. Remember, investing just $300 per month at an 8% return for 40 years would make you a millionaire by the time you retire.
Slow and steady wins the race when it comes to long-term investment success.
Running Up Credit Card Debt
If there’s one thing you want to avoid doing more than perhaps anything else as you approach retirement, it’s running up credit card debt. For starters, this is a sign that you’re spending more than you earn, which could have huge ramifications when you retire on a fixed income.
But it also will act as a financial drain on your retirement finances that may be difficult to control. Not only will you have to make room in your retirement budget for principal payments, you’ll also have to pay off all of the interest you accumulate. This is a poor use of your financial resources and should be avoided at all costs, especially with retirement on the horizon.
Claiming Social Security Too Early
You can file for Social Security retirement benefits as early as age 62. However, that’s something that you might want to avoid if you’re looking to maximize your monthly payout, especially if you live a long life.
If you claim benefits early, you’ll be permanently reducing your monthly benefit by a significant amount. Specifically, you’ll receive 30% less than you would at your full retirement age of 67. If you could wait until age 70 instead, your lifelong benefits would increase by roughly 77% over what you would receive at age 62.
While there may be some situations in which filing at 62 makes sense, it’s a fact that you’ll be locking in a lower monthly payment for the rest of your life.
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This article originally appeared on GOBankingRates.com: 6 Things To Avoid Doing With Your Money Before You Retire