You’ve spent years working and saving for your retirement. You seemingly have done everything right and have avoided common mistakes; you’ve started saving early, took advantage of your employer’s 401(k), or set up a retirement plan for your own business. However, is there more you should be doing? Retirement planning is a strategic process allowing you to fulfill your lifestyle goals and maintain financial security in retirement.
Retirement Mistake: Not Considering Tax Implications
Taxes may have a significant impact on your retirement savings. While paying taxes is something we all must do, proper retirement tax planning can further stretch your saved dollars. Depending on the type of retirement accounts you have, your withdrawals may be subject to income tax. Remember, taking a withdrawal can put you in a higher tax bracket. It’s essential to consider this when planning your withdrawals. However, at age 72, you will be subject to mandatory withdrawals called “required minimum distributions” or RMDs.
Of course, if you have a Roth IRA or Roth 401(k), your withdrawals will be tax-free. Roth IRAs also benefit from having no RMDs, meaning you never have to withdraw any funds. If appropriate for your financial situation, leaving a Roth to your beneficiaries offers them the advantage of allowing the assets to continue to grow tax-free for up to 10 additional years after receiving the Roth IRA (beneficiaries must make withdrawals after 10 years). This can be an enormous benefit when considering the best way to transfer assets to your loved ones.
Your financial advisor can help you decide when you should start taking distributions, how much you should take, and which accounts you should withdraw from. Your advisor can also help you decide if converting a traditional retirement account into a Roth is right for you.
Retirement Mistake: Not Being Strategic About Social Security
While you can start taking Social Security as early as age 62, you are only entitled to your maximum benefit amount when you reach full retirement age. However, if you delay taking your benefits further, your benefit will increase each year until you turn 70. This begs the question – should you wait until your full retirement age to take Social Security, should you start early and take it at 62, or should you maximize your monthly benefit and take it at 70? An article we previously published breaks down what happens if you take Social Security early or if you delay your benefits.
There is no one size fits all answer to when you should start taking Social Security. At Prosperity, we consider your current age, assets, income, expenses, health, life expectancy, and cash flow projections to calculate the optimal time for you to take Social Security.
Retirement Mistake: Not Implementing an Estate Plan
Even when you think your estate plan is in good order, it is essential to ensure there are no loose ends. While wills and trusts may be the first thing that come to mind when estate planning, it is also important to ensure the titling of your assets and beneficiary designations are correct. Other legal documents such as Power of Attorneys or Health Care Directives should also be reviewed.
We recently had a webinar series covering estate planning. We answered questions such as how you should title your property, and should you add children to the title? What can you do to protect your assets if you need long-term care? If you missed the webinar, you can access it from our events page here.
Are you ready for retirement?
Proper retirement planning may help ensure you maintain your lifestyle in retirement and that your money is doing the most it can to provide you with financial security and peace of mind. Are you ready for retirement? Take our retirement readiness quiz to find out!
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