When you work hard your entire life, you want a comfortable retirement to look forward to — and that means having enough money to pay your bills with enough left over for leisure and entertainment. But if you fall victim to these blunders, you could wind up in the opposite scenario — miserable and cash-strapped for years on end.
1. Waiting too long to start saving
Though Social Security will play a big role in your retirement finances, you can’t expect to live on those benefits alone. The average senior today collects about $18,000 a year in Social Security, and chances are, you’ll need a lot more annual income than that to maintain a decent lifestyle.
That’s why it’s crucial to build savings of your own in a 401(k) or IRA. But don’t wait too long to start contributing. The sooner you do, the more opportunity you’ll have to invest your money and grow wealth via gains in your account.
Imagine you start socking away $300 a month for retirement at age 45, with the goal of leaving the workforce at 67. If your investments generate an average annual 7% return — which is doable when you load up on stocks — you’ll wind up with $176,000. That may seem like a decent chunk of cash, but it’s actually not a ton of money in the course of what could be a 20-year retirement or longer. On the other hand, if you begin saving that $300 a month at age 35, you’ll end up with $397,000, assuming a retirement age of 67 and an average yearly 7% return on investment.
2. Filing for Social Security too early
Though you can’t retire comfortably on Social Security alone, those benefits will certainly help you pay your bills. But if you claim them too early, you’ll slash what could be a substantial income stream for life.
You’re entitled to your full monthly Social Security benefit based on your earnings history at full retirement age, which is either 66, 67, or somewhere in between, depending on the year you were born. You’re allowed to sign up for benefits as early as age 62, but for each month you file before full retirement age, your benefits get slashed on a permanent basis, so be careful not to claim those benefits too soon. In fact, you might consider delaying benefits past full retirement age. For each year you do, they increase by 8%, up until age 70.
3. Not earmarking money for healthcare costs in retirement
It’s estimated that the average healthy 65-year-old couple today will spend $387,644 on healthcare costs throughout retirement. Even if you save nicely in your IRA or 401(k), you may find yourself overwhelmed with medical bills later in life, especially when you factor in your various premiums, deductibles, and copays under Medicare.
The solution? Contribute to a health savings account (HSA) while you’re still working. To qualify, you must be enrolled in a high-deductible health insurance plan, defined currently as an individual deductible of $1,400 or more, or a family level deductible of $2,800 or more. From there, you can set aside funds to cover near-term medical expenses, and carry unused funds forward all the way into retirement so there’s money dedicated to healthcare when you’re likely to need it the most. Furthermore, with an HSA, you can invest your unused funds so that your balance grows exponentially over time.
The choices you make ahead of retirement will dictate how well you fare financially during that period of life. Avoid these mistakes, and with any luck, you’ll enjoy your senior years to the fullest without being held back by financial worries.