Retirement planning is not something a person sits down to write out a few years before exiting the workforce. It’s a long, drawn-out undertaking where it’s helpful to start early, and very important to keep always in mind through the years to avoid costly retirement planning mistakes.
There are some common retirement planning misdeeds, such as incurring additional taxes by withdrawing from a retirement fund too early. However, two very costly mistakes can catch many retirement planners by surprise.
First, don’t forget about taxes or other potential additional costs way down the road when setting your retirement funding level target. Distributions from retirement accounts are taxed as regular income, so big withdrawals can lose sizable chunks of money.
Think about increasing your ultimate retirement savings goal to cover future taxes. Keep in mind that tax rates could be raised years down the road to make it hurt even more. Do not expect today’s conditions, e.g. tax brackets and rates, to remain forever.
Second, avoid the impulse to stop working early. Whether that means cashing out of a retirement fund early, stopping or reducing contributions as retirement approaches, or simply deciding to retire too early. All of these impact the overall value of retirement funds, which negatively impacts the compound growth potential from interest.
Hindering the growth of the total retirement fund, such as by reducing or eliminating consistent contributions to it (such as from ongoing paychecks), chips away at the interest compounding effect, which can be significantly costly long-term.
Finally, perhaps the most costly mistake is poorly planning for retirement. Recent federal studies estimate that almost a quarter of Americans lack retirement savings or pensions entirely — a sobering thought. The best retirement plans take time to develop properly, with adjustments needed along the way, which makes it imperative to establish a plan as early as possible.