5 Money Mistakes That Could Derail Your Retirement

According to the Retirement Preparedness Measure (RPM) more than half of Americans need to take action with smart money moves if they are going to reach their retirement savings goals.

While the average RPM is 74%, a shocking 41% of Americans have an RPM of 65 or lower.

This places them squarely in the “poor” category of retirement preparedness.

An additional 14% of Americans have an RPM between 65 and 80, which lands them in the “fair” category.

Investors in the “fair” category still need to take action to ensure a comfortable, financially secure retirement. Only 33% of Americans are in the “very good” or comfortable category with an RPM of 95 or higher.

Here are five common planning mistakes that may put a damper on retirement plans and lead to a low RPM.

Having no plan

When it comes to retirement planning, the old saying holds true, “If you fail to plan, you’ve planned to fail.”

Most Americans understand the importance of retirement planning, but may not have made it a priority.

According to the 2021 Retirement Confidence Survey, 58% of workers say they disagree with the statement, “Retirement savings is not a priority relative to the current needs of my family. Tellingly, four out of 10 workers say that excessive debt and saving for college is negatively affecting the ability to plan for retirement.

To prepare, the key is to make saving and retirement planning a financial priority. According to experts, prioritizing retirement savings over college savings is crucial.

There are other methods for paying for college including loans, grants, scholarships and working are all available avenues to help pay for education. However, alternative options do not exist for retirement.

Not using tax-deferred retirement savings plans

The government has made tax-deferred retirement savings plans available to encourage Americans to plan for and save for retirement. These savings plans include 401(k)s and traditional IRAs, which are available through the workplace and are sponsored by employers.

With 401(k)s, contributions reduce current income, which may then lower current taxes. Funds also grow tax-deferred.

Traditional IRAs also offer current tax deductions while funds grow on a tax-deferred basis. When funds are withdrawn in retirement taxes are assessed at ordinary income tax rates.

In 2021, future retirees can contribute to an IRA up to $7,000 for individuals ages 50 and older or $6,000 for those are younger. The 2021 contribution limit in a 401(k) is $26,000 for investors ages 50 years and older and $19,500 for younger investors.

Spending retirement account proceeds instead of rolling them over

Employees must make critical decisions about what to do with workplace retirement account balances when changing jobs. The main options are leave the money in the plan, take the money in a lump sum or roll over the money into an IRA or a new employer’s retirement plan.

According to experts, the worst option for retirement planners is to take the money in a lump sum and spend it. Spending the money will decrease retirement financial prospects.

By withdrawing the funds, investors could end up receiving only 70% of the money after penalties and taxes (for individuals under age 59 ½) are withheld.

Financial planners recommend that the best option is rolling over funds into an IRA or the new employer’s 401(k) plan. To avoid an automatic 20% withholding for taxes, future retirees should make sure that the retirement plan assets are rolled directly into the IRA.

Not taking charge of investments

Successful retirement investing requires diligence and attention in order to ensure that the portfolio is properly diversified and the right securities are in place.

To take control of your retirement investments, financial experts recommend using a self-directed IRA. This type of IRA can give more options for investment of retirement funds and help achieve greater diversification.

Options in a self-directed IRA include a wide range of non-traditional assets, other than bonds, stocks and cash equivalents. These non-traditional assets include private equity, real estate, precious metals, cryptocurrencies, promissory notes, tax liens and limited partnerships, along with other options.

Self-directed plans are available as both Roth IRAs and traditional IRAs.

Failing to diversify retirement portfolios

One of the biggest keys to a financially successful retirement is diversification. Diversification means spreading out investments across your retirement portfolio.

These investments should be spread across bonds, stocks and cash, taking lengths of time, investing objectives and risk tolerance in mind.

As the saying goes, “Don’t put your eggs (or retirement eggs) all in one basket.” By having the right mix of assets, investors can shore up investment returns over the long term.