Introduction
One of the primary desires for people with their retirement is total financial independence when the time comes. So, most take up different strategies to increase their retirement savings early on, yet they must be wary of retirement planning mistakes. With correct planning, one can save enough to cover costs for sudden emergencies and luxury-related expenses when they lose a steady income later.
However, some unanticipated problems can come up that can hamper your initial retirement plan expectations. Or, you might make a wrong financial move that backfires in the future, causing you to save less than you initially intended by the time you retire.
If you start planning late, like in your 50s, such wrong moves will severely reduce your total retirement savings. So, you should be more meticulous with your retirement plan and avoid errors. Here are some of the most common retirement planning mistakes to be wary of and the best step to take instead.
Error 1: Not preparing a clear budget plan
Bad financial planning is one of the most common issues that can hamper retirement goals.
Adopting and maintaining a proper budgeting method is vital for people to control their expenses and save income. Ideally, you should start focusing on budget planning years before reaching retirement age. This way, you can develop a healthy spending habit where you prioritize savings over sporadic expenditure.
Not prioritizing this is one of the worst retirement mistakes that some people make when they start retirement planning at 50. They follow a budget system they created based on their regular income metrics instead of planning.
What to do instead: Use a historical budgeting system
Of course, it is impossible to predict the exact time you will retire to plan a budget for that period. But, you should determine your general spending limit carefully and then plan a suitable budget for your changing lifestyle and income.
Use a system that analyzes historical data, i.e., your past spending amounts and allocations. A high-grade historical budgeting system will accurately check your prior budget periods against market conditions like inflation, interest rate fluctuations, etc. This way, you can plan a suitable budget plan for yourself.
Error 2: Not getting rid of high-interest debt quickly
Outstanding debt can badly affect the financial goals of any person. You must pay off your debt before reaching full retirement age, mainly to avoid a bad financial situation in old age.
If you are in your fifties, you should prioritize paying off your high-interest debt more seriously. However, one of the common retirement mistakes people end up making at this point is continuing to incur more debt instead.
What to do instead: Debt relief methods
If you have credit cards, you should avoid using them to make huge purchases in your 50s. This is especially so in case you still have not paid off previous high-interest credit card debt.
The best solution in this situation is to opt for a debt relief method. For high-interest debt, options like debt consolidation are best to pay off outstanding debt fast. For example, you can get a balance transfer credit card with 0% introductory APR. Using this card, pay off the combined total of your credit card balances from multiple cards. After the introductory period ends, the interest rate will increase exponentially, so pay off most of the debt sooner.
Other methods like debt management or debt settlement are also useful for different debtors. Check your financial situation at 50, including your credit score and existing debts, to choose a strategy most suitable for your needs.
Error 3: Not considering medical costs
One of the biggest retirement planning mistakes people in their 50s are guilty of is not prioritizing health care expenses in their plans.
Yes, it is impossible to perfectly predict what health issues can affect a person, especially in their later years. Even people with good general health can undergo sudden emergent situations, like an accident, disease, etc. Such risks are higher for older adults, so they typically have to pay more healthcare costs. In fact, the Personal Health Care (PHC) expenses for adults aged 65 years and above were around $1.2 trillion as per the 2020 CMS reports.
Typically, people get medical insurance benefits from employer-sponsored plans during their working years. For example, one can depend on their tax-advantaged HSA (Health Savings Account) for qualified health costs. Here, the employers add funds with specified contribution limits per year. However, after retirement, the person has to manage the health costs on their own. This can become difficult to handle for retirees with limited income, especially if they face big medical emergencies.
What to do instead: Opt for suitable health insurance
You can rely on Medicare after retirement, but you need to be over 65 years of age for eligibility. In your 50s, you should check different eligible individual health insurance options. Then, get one most suitable for you.
Review your general health and research your family history as well to know what your health risks are. Based on such factors, start saving for health care costs in retirement. On average, it is ideal to target $100,000-$200,000 for health-related savings.
Error 4: Keeping secrets from your spouse
Many people do not consider the financial moves of their spouse when planning their retirement. This is one important mistake to avoid.
The plans you make for your retirement will inevitably affect your spouse and family members. So, you must discuss your retirement planning strategies and financial goals with your spouse.
Moreover, avoid taking full financial responsibility or even expecting the same from your partner. Instead, you should make a system that both of you can work with to manage your finances when you approach retirement.
What to do instead: Update your spouse about your financial plan
Spouses must have a joint understanding of their financial responsibilities for retirement. These include factors like what bills to pay, your retirement portfolio, estate planning wishes, etc.
So, both spouses should document each other’s requirements, including what the other wants with their assets in case of death. Keep track of your joint retirement income, your savings in individual retirement accounts, contact details of your financial advisor, etc. In case of changes in plans, discuss them with your spouse so that they are aware of the correct steps to take.
Error 5: Claiming your Social Security quickly
Some people in their 50s decide to retire early and want to claim their investments sooner. Their intention is simple- withdrawing more money for long-term benefits. However, claiming these benefits sooner will deplete the retirement accounts faster. The same happens if you try to claim social security benefits prematurely.
Adults must be at least 59+ to apply for penalty-free retirement account withdrawals. As per Social Security Administration (SSA) regulations, one must be 62 to qualify for these retirement benefits. So, this is a retirement mistake that is common among those in their late 50s mainly.
What to do instead: Wait for Social Security to mature
Typically, people are eligible to start taking their Social Security benefits when they turn 62. But if you defer claiming these payments, then your amount will increase each year, as per the Social Security Administration.
At age 70, you can take out the entire amount altogether. So, delay social security as long as possible and rely on other income sources for retirement funds until then.
Plus, you should get a complete analysis of your social security details to see what other ways you can claim the benefits as a spouse. Failing to consider possible Social Security spouse’s benefits is another mistake to avoid.
Error 6: Disregarding the value of retirement accounts
One of the biggest retirement planning mistakes that some people end up making is not researching all money-saving options for retirement. They use simple strategies instead, like saving a portion of income into a savings account. On the other hand, it is more profitable to open specific retirement accounts and increase retirement savings that way.
Even people living a paycheck-to-paycheck lifestyle can increase their retirement income if they save with retirement accounts. Due to compound interest that applies to this amount, the fund within such an account will grow over time.
What to do instead: Apply for retirement accounts
There are different types of retirement accounts available that you can choose from. With a traditional individual retirement account (IRA) or Roth IRA, you can add around $8,000 per year at age 50 or up.
Unlike with a traditional IRA, the employers match contributions with a 401(k) plan type. You can add around $23,000 annually into your 401(k). In your 50s, you can add catch-up contributions of about $7,500 as of 2024. Overall, you should contribute around 10%-15% of your income towards such savings for retirement.
Error 7: Quitting work too early
On average, most people change their job multiple times throughout their careers. In fact, any financial advisor will suggest the same in the context of improving professional experience. However, if you quit your jobs too often or stop working at 50 entirely, that will backfire for you in terms of your vesting situation. Let’s elaborate on that.
What to do instead: Check your vesting schedule
You can apply for employee contribution plans like a 401k or invest in stock options. The employer will match contributions to this plan during your employment period. In relation to this, you should check the vesting schedule. This refers to the timeline that employees are contractually obligated to fulfill tenure at the company to fully own the stocks or funds they earned as contributions.
Check with your employer to see your vesting schedule and review the deadline for its maturity. If you are close to the end of the vestment, stay employed to receive benefits fully.
Error 8: Not considering life insurance seriously
One common mistake that many retirees make is disregarding life insurance ahead of time. However, in reality, you will have a much more difficult time applying for a long-term insurance policy if you buy it later in life. Health issues will start worsening more in your 60s, and you will find fewer affordable policy options then.
What to do instead: Get a term life insurance
It is better to buy a life insurance policy in your early 50s. In case of premature death, this will protect your family and loved ones financially, besides your savings. Compare different permanent and term life insurance options suitable for your needs.
Error 9: Not keeping estate documents up to date
One of the biggest retirement mistakes one can make is not updating their documents, especially those related to their assets.
Let’s say you have prepared an estate plan for your assets in the early years of life. For example, you have decided the points to add to your will or trust regarding asset distribution, choosing beneficiaries, etc. However, things can change with time, including family dynamics. So, most legal advisors will suggest reviewing and updating one’s estate plan before fully retiring.
What to do instead: Review and upgrade your estate plan
If you prepared an estate plan for your assets at a younger age, review it again in your 50s. You might have to change specific points in your plan, like adding or removing beneficiaries, naming a new executor, etc. Also, you might need to update clauses in your plan as per recent estate law changes in your state.
So, you should review your financial documents related to health care proxies, power of attorneys, wills, trusts, etc. Take the help of a trusted financial advisor to create an updated plan.
Error 10: Disregarding tax-related obligations
One of the worst retirement mistakes that 50+ adults make is not focusing on their tax-related obligations properly. For example, in terms of estate planning, you have to check what federal estate taxes apply in your state and plan around your tax consequences.
What to do instead: Research estate tax consequences
The federal estate tax applies to all estates with a $12.92 million or more valuation; the tax rate ranges between 18% to 40%. Eighteen states have separate inheritance or estate taxes, while Maryland is the only one with both inheritance and estate taxes.
Specific states like Washington and Oregon have low exemption amounts for estate taxes. So, if you, as the grantor, die prematurely and your estate has a higher value than the exemption amount in your state, you have to pay state estate taxes.
Go over the details of your assets with your estate planner and prepare your retirement plan around this. For example, you can get life insurance if you mostly own illiquid assets, like a business or a farm, to cover the estate taxes. Consult further with your estate planner on other solutions to cover the tax burden.
Conclusion
Altogether, mistakes are possible when saving up retirement income, especially in your 50s. However, if you smartly manage your finances and prepare a suitable plan with qualified financial advisors, you can avoid such retirement mistakes.
Focus on different things, like adjusting your estate planning and insurance, paying off all debts, and increasing your savings using a variety of retirement accounts. When you manage all these aspects properly before reaching retirement age, you will likely experience financial freedom in your later years.
Author Bio: Attorney Loretta Kilday has over 36 years of litigation and transactional experience, specializing in business, collection, and family law. She frequently writes on various financial and legal matters. She is a graduate of DePaul University with a Juris Doctor degree and a spokesperson for Debt Consolidation Care (DebtCC) online debt relief forum.
