Getting Your Retirement Back on Track
En español | The choices you make with your money can come back to haunt you years later. How much you spend and how much you save during your working years help determine how much you'll have to live on once you retire. Here's a look at six common financial choices you could face and how each could impact your retirement plans and leave you regretting those financial decisions.
Money Regret No. 1: Skimping on saving
Not saving enough during your working years is a big mistake that may force you to delay retirement and live less comfortably once you do. Happily, 60 percent of workers feel confident that they're building a large enough nest egg for retirement, according to the Transamerica Center for Retirement Studies. Unfortunately, the coronavirus and recession have shaken some people's confidence: 23 percent of workers say they're less confident in their ability to retire comfortably in light of the pandemic.
If you're among the portion of people who are not so confident, boost your efforts to save for retirement as soon as possible. Start small and work your way up as finances allow. Spending a little less will let you to save a little more. Once you hit age 50, take advantage of higher catch-up contribution limits for retirement accounts: In 2020, you can put up to $7,000 total in traditional and Roth IRAs ($1,000 more than younger workers) and up to $26,000 in a 401(k) or similar employer-sponsored retirement account ($6,500 more than younger workers).
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Money Regret No. 2: Avoiding the stock market
You might think of stocks as too risky, especially amid recent market turmoil. But skipping stocks completely is not necessarily the answer. One major reason: Investing in the stock market is your best bet for beating inflation. And while the current rate of inflation is low, it likely won't stay low forever.
Even at a low rate, any cash you're stuffing under your mattress is losing purchasing power by that much. Money safely stowed at the bank doesn't fare much better. The interest rate on a savings account is just 0.09 percent, on average, according to Bankrate. By contrast, Standard & Poor's 500-stock index, a widely used benchmark for stock performance, has returned an annualized 11.6 percent, including reinvested dividends, over the past five years through September 15, according to Morningstar.
"Especially in uncertain times like we're seeing now, people might panic and avoid the stock market because they think they cannot afford to lose — and they're right, they cannot afford to lose all their money — but they can't afford to have all their money sitting in cash, either,” says Marguerita M. Cheng, Certified Financial Planner and chief executive officer of financial planning firm Blue Ocean Global Wealth, based in Gaithersburg, Maryland.
Considering retirement could last for 30 years or more, given increasing longevity, you want to keep investing for the long haul as you get older. Start as early as your financial situation allows and invest as much as you can afford. A low-cost mutual fund that holds a basket of stocks can be opened for as little as $50. As your nest egg grows, reduce risk as you approach and enter retirement by gradually shifting stock money into more conservative investments.
"People mistakenly get caught up in taking too much risk,” says Taylor Schulte, San Diego-based Certified Financial Planner and host of the Stay Wealthy retirement podcast. “I'd rather have someone take less risk and be comfortable, be able to sleep well at night, and be able to stick with their investment plan. That is what's really important in order to have investment success."
Money Regret No. 3: Spoiling your kids
In your working years, you may feel torn between two common financial goals: your retirement and your child's education. You can certainly try to work both into your financial plan, if realistic, but most experts recommend prioritizing your retirement, as selfish as that might seem. One common argument for this strategy is that there are no financial aid packages for your retirement like there are for covering school costs. Another is that without ensuring your financial independence in retirement, you risk becoming a burden on your children later in life.
Even for other financial assistance you may offer your adult kids — whether it's paying for a wedding or keeping a roof over their heads — remember to keep your own needs in mind. “People don't regret helping their adult children, but they regret not setting boundaries when helping their adult kids,” Cheng says. Be sure to figure out how much you can really afford and are willing to provide for your children. And be clear with them about all the details so you're on the same page from the beginning.
Money Regret No. 4: Missing out on a Roth
While you're still working, contributing as much as you can spare to either a Roth IRA, a Roth 401(k) or both can be a good idea. Unlike a traditional tax-deferred retirement account, the Roth versions require you to pay taxes upfront on your contributions, but withdrawals you take after retirement are tax-free, as long as the account has been open for at least five years and you're at least 59 1/2 years old. Plus, with a Roth IRA, you can leave the money untouched as long as you want, unlike with a traditional 401(k) or IRA, from which you must start taking annual required minimum distributions (RMDs) by the April following the year you turn 72 years old. After-tax money saved in a Roth 401(k), if your employer offers one, can later be moved into a Roth IRA. “The Roth account is a magical thing that gives you a lot of flexibility in retirement,” Schulte says.
After you've retired, you might still be able to take advantage of those Roth benefits even with money you've saved in other types of tax-deferred retirement accounts. A Roth conversion allows you to transfer funds from a traditional 401(k) or IRA to a Roth IRA. The catch is that you have to pay taxes on those tax-deferred contributions. To decide whether that's a good tradeoff in your situation, Schulte recommends doing a Roth conversion analysis every year in retirement by considering the tax implications and seeing how you might adjust your income levels — perhaps by delaying Social Security or pension payouts — to lower your tax bracket. “In doing Roth conversions, we're trying to get money out of those accounts annually as cheaply as possible,” he says.
Money Regret No. 5: Ignoring long-term care
The potential costs of long-term care are too steep to ignore — and Medicare doesn't cover them. Just how steep? Adult day health care runs an average of $19,500 a year and a private room in a nursing home averages $102,200 annually, according to insurance company Genworth. So the sooner you can start planning for long-term care, the more time you will have to weigh your options.
Cheng suggests first thinking about where you plan to retire. Do you expect to stay near family who would help with your care as you age, possibility allowing you to remain at home longer? Or do you envision retiring far away from loved ones? Next, consider what kind of long-term care you'd prefer. For example, would you want to have skilled in-home care, or does an assisted living facility make more sense? Then, you can be realistic about your future finances and consider your options to cover the costs. “This does not mean you need to run out and buy insurance right now,” Cheng says. “But it's important to be proactive, so you're the one deciding, and your family isn't the one deciding for you later."
Money Regret No. 6: Buying a timeshare
Plenty of people plan to have a vacation-filled retirement, and a timeshare might seem like a cost-effective way to invest in one. After all, buying a timeshare offers the promise of property in a primo vacation destination so you can visit your favorite spot more often and make it like a home away from home for far less than the cost of buying a second home outright. You can even swap a stay in your property for another destination in your timeshare network.
But the deals can be more complex and costly than you might think. Swapping can be tricky, as your desired timeslots and destinations may not be available. As for costs, the average price of a timeshare is $21,455, according to the American Resort Development Association, the trade association for the timeshare industry. (Actual prices vary widely and depend on a number of factors, including location, unit size and property type.) And maintenance fees average $1,000 a year — ranging from $640, on average, for a studio to $1,290 for a three-bedroom. Plus, those fees tend to go up over time. Selling an unwanted timeshare can be difficult, even impossible.
"Some of my clients do mention that they regret purchasing timeshares because of a variety of reasons: unpredictable maintenance costs, changes in access and availability, and boredom,” Cheng says. “Sometimes, the place they enjoyed when their kids and grandkids were younger is no longer appealing. Airbnb and Booking.com have provided them with more flexibility and choice."