7 Things That Feel Responsible but Could Be Wrecking Your Retirement
Many of the financial habits people have been taught to admire, such as paying off debt quickly or keeping a robust emergency fund, sound responsible. But according to financial planners, some of them can reduce the wealth you'll have decades from now.
Here's where good intentions can become costly mistakes and what to do instead.
Find Out: 2 Years on Social Security Paychecks: Does It Cover the Basics?
You’re Savvy: 11 Subtly Genius Things All Wealthy People Do With Their Money — That You Should Do, Too
1. Paying Off Low-Interest Debt Too Fast
Becoming debt-free is a worthy goal, but not every debt needs to be eliminated as quickly as possible.
Trevor Houston, CEO at ClearPath Wealth Strategies, LLC, warned against aggressively paying down low-interest debt at the expense of retirement planning. While getting out of debt is ultimately a good thing, “sacrificing your retirement savings to get there a little faster will only hurt you in the long run,” he said.
High-interest debt is the best kind to approach aggressively. Any debt with interest below expected average returns can be repaid only after maxing out tax-advantaged retirement accounts, which offer immediate higher percentages even before compound growth.
2. Keeping Too Much Cash
Cash provides security and flexibility, but it never keeps up with costs in the long term on its own.
"Sitting on large cash reserves for years means losing purchasing power to inflation and missing out on growth that could be funding decades of retirement," said Mario Riccadonna, a certified financial planner (CFP) and enrolled agent (EA) at Carson Wealth.
At minimum, keep funds invested in a money market or high-yield savings, but also consider only having the maximum in cash needed for a true emergency.
3. Not Thinking Through Your Investment Strategy
Given that retirement can last 25 to 30 years or more, a portfolio that's overly conservative early on “may not keep pace with inflation over that time horizon,” Riccadonna said. “Being safe with your investments can quietly become one of the riskier things you do for a multi-decade retirement."
Vega agreed that strategy is key. People who try to time the market often lose out. Additionally, it’s good to get professional consultation to make sure your portfolio is not just keeping up with inflation “but earning as much your portfolio is capable of," Vega said.
4. Putting Your Adult Children Ahead of Your Retirement
Helping grown children often feels like the right thing to do. But Houston said he sees parents too often putting their own retirements at risk to do so.
“Just be careful to not pull the engine out of your own retirement in order to keep someone else's car running," he said.
Riccadonna encourages clients to fund their own retirements first, “the same way you'd put on your own oxygen mask before helping others."
5. Ignoring Tax Planning Until Retirement Is Almost Here
Many people focus on saving but spend little time thinking through the tax implications of required minimum distributions (RMDs).
Riccadonna said the biggest mistake is failing to plan for RMDs until they're required. He recommended a multiyear Roth conversion strategy in the years before RMDs begin as it's “one of the most underused tools."
Another problem is people who only contribute to a 401(k) and then find themselves “flying into the next higher tax bracket and many times into the IRMAA penalty box” at RMD time, Vega said.
"Don't just rely on your 401(k) to get you to retirement. Fill other buckets, Roth buckets and after-tax savings,” he added.
6. Assuming a Big Paycheck Means You're Ready
High earners may assume they’ll be fine when retirement comes, however, Houston warned, “lifestyle inflation has a way of growing right alongside your income, so making more money doesn't automatically mean you'll be ready for retirement."
Life changes can also impact your retirement plan if you don’t prepare, Houston said. You get a raise, you lose your job, you get married, you divorce, you hit a new life event, but your retirement plan doesn't seem to change. Your retirement plan should grow and change as your life does."
7. Waiting Until Retirement To Think About Spending
Saving for retirement is only half the equation. Retirees also need a plan for how they'll spend, emotionally and financially, once they stop working.
Christina Lynn, a CFP and director at Mariner Wealth Advisors, said that "Retirement decisions aren't solved by spreadsheets alone." She said that many retirees overspend early in retirement due to “present bias,” where “their future self feels far away.” And while she said it’s understandable that after decades of work they want to make up for lost time, travel, enjoy and celebrate, that mindset often leads "to running the risk of coming up short later."
At any rate, "most retirements aren't made or broken by one big financial decision, they're the result of hundreds of small decisions you make over time," Houston concluded.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
More From MoneyLion: