You’ve probably heard the expression, “You can’t uncrack an egg.” It might be silly, but it’s true, if you think about it.
And you can’t uncrack your nest egg, either.
There are some financial and retirement decisions you can’t take back, no matter how bad they end up being. That’s why it’s so important to truly understand all your options and carefully weigh all of the potential outcomes before making a decision about your financial future, from impulsively selling your home and moving, to cashing out your retirement plan early.
Some of the biggest financial decisions you might come to regret with regard to retirement are the ones that can have the largest impact, take the most significant chunk out of your bottom line, and alter the financial legacy you leave behind for your loved ones.
In my experience as a financial advisor in San Antonio, Texas, there are 5 financial pitfalls we often see people encounter. It’s important to know why they can be an issue, and how you can avoid making the same mistakes yourself.
1. When to Start Taking Social Security Benefits
Even though you’re eligible to start collecting your Social Security benefits at age 62, you don’t have to, and it may be in your best financial interest to wait.
Once you notify the Social Security Administration that you plan to begin collecting your Social Security benefits, except for a few exceptions, the decision is permanent and cannot be undone.
Talk to a financial advisor at PAX Financial Group to determine what age is right for you. If you can hold off on applying to receive your Social Security benefits until later, the amount you receive will increase, not just now, but for as long as you receive benefits.
Take “Mary” for example. Mary was born in 1960, and her full retirement age is 67. If she started taking her Social Security benefits at age 62, the amount she’d receive each month would be 30 percent lower than if she had waited until age 67. On the flip side, if Mary waited to start taking her benefits until age 70, her monthly check will be higher, due to delayed retirement credits.
Except for the exceptions listed above, this decision is permanent.
2. How to Receive Your Pension Benefits
If you’re lucky enough to have a pension, you likely have a choice when you retire: Take a lump-sum buyout now, or receive monthly pension payments.
Being handed a pile of money at the start of retirement can be an attractive proposition, but there are drawbacks, too, the most significant being that you have to make the funds last throughout your retirement. Some retirees roll over the money into a Traditional IRA to shield it from taxes until withdrawn. While this strategy may give you more control over your money, you’re also left with the responsibility of making it last a lifetime.
Before choosing how to receive your pension benefits, talk to a financial advisor. Determine your retirement expenses and how much income you’ll need. Estimate your longevity and your other retirement assets if any. Read our recent blog post: 15 Things to Have in Place Before You Retire.
3. When to Start Your Retirement Planning
As one of PAX Financial Group’s financial advisors in San Antonio, Texas, I can tell you that when it comes to saving for retirement, the sooner you start, the better. For every year that passes in which you don’t start planning and saving for your retirement, the amount you’ll need to save each year grows exponentially.
Obviously, you can’t go back in time, so if you haven’t started planning for retirement yet, the next best thing you can do is to start now. Talk to a financial advisor to hash out a realistic plan and figure out what you need to do to get to where you want to be. For example, if you’re 50 or older, you can make catch-up contributions to certain types of retirement accounts, in addition to the maximum annual contributions. In 2021, you can contribute a max of $19,500 to a 401(k) account, plus an extra $6,500 catch-up. For an Individual Retirement Account (IRA), the max contribution is $6,000, plus an extra $1,000 to catch-up.
4. Cashing Out Your Retirement Plan(s) Early
Although there are many reasons you might want to tap into your retirement savings early (before the age of 59-½), be it a job loss or other hardship, to pay off debt or to finance your daughter’s wedding, there are 3 pretty big reasons to look for an alternative.
- Taxes – The IRS takes 20 percent of early 401(k) withdrawals, right off the top, for income taxes.
- Penalties – The IRS also levies an additional 10 percent penalty on your tax return.
- Less earning power – If a lower account balance and the taxes and penalties themselves weren’t enough of a deterrent, think about the lost potential for growth. You’re limiting your ability to benefit from market rebounds.
Although there are some exceptions to the 10 percent penalty, such as having to cash out a retirement plan to split your 401(k) in a divorce, the general rule is to leave your 401(k) alone unless absolutely necessary. Ultimately, if you do have to take an early withdrawal, talk to a financial advisor to determine how much you really need. You don’t want the temptation to withdrawal extra, “just in case.”
If you want help navigating a particular financial goal like those listed above, read our recent blog posts:
The Coronavirus Shows Why an Emergency Fund is Crucial
Tips to Paying Off Debt Early – PAX Financial Group Answers Common Questions
What’s the Price Tag of a Wedding? How Do You Pay for a Child’s Big Day?
If you have a goal not mentioned here, let’s talk and put a plan in place.
5. Avoiding the Stock Market
Investing involves risk. It’s no secret that your money isn’t as safe in the stock market as it would be in a savings account. But in exchange for that protection, you’re giving up growth potential.
If you’re stashing your nest egg in a savings account, even a high-yield Certificate of Deposit (CD), the interest your money is earning probably isn’t even keeping up with inflation.
There are plenty of investment strategies to choose from that match your risk tolerance. The key is determining which of those strategies is right for you.
The Takeaway
The best way to avoid making a big decision you can’t undo? Talk to a financial advisor and understand the true effects each has on your big picture.
PAX Financial Group’s team of financial advisors in San Antonio, Texas is ready to help. Too many people make expensive mistakes about their retirement. Don’t be one of them!
This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.
