Retirement planning entails a lot more than simply socking away money for the day you decide to stop working. There are a number of tax issues, and you also need to consider just what it'll take to maintain a standard of living that you can enjoy. Let's take a look at four of the most common ways people get tripped up during retirement planning.
The Tax Man Cometh
Knowing which types of retirement accounts call for you to pay taxes when you cash out is important. For example, a traditional 401(k) plan is taxed upon withdrawal of money from the account, and there may also be penalties for early withdrawals. A Roth 401(k), on the other hand, is made with after-tax money, and withdrawals are tax-free under most circumstance. Conversely, the traditional 401(k) is protected against many types of litigation, making it appealing to professionals who work in jobs that carry high risks of being sued, such as doctors and lawyer.
How Much to Put Back
Some professionals encourage savings at a rate of 10%, but a more general rule of thumb that many retirement advisors use is that you should plan to have retirement income that equals 70% of your previous employment income. Notably, you will likely have access to other sources of money, such as Social Security, that can offset some of the difference. Also, Medicare is generally a lot cheaper than private healthcare, even for those who have very high retirement incomes.
Where people frequently get tripped up is in anticipating how long they'll survive. Working from the national average might tell you to plan to live to roughly 80 or 85 years, but bear in mind that lots of folks end up living well past that point. As you do retirement planning, it's wise to ensure that you have enough money to overshoot the mark.
Real Estate as a Sequester of Wealth
Another factor worth looking at is how much equity can be drawn from your house. Folks who've had large families, for example, may elect to sell their properties outright in order to access all the value at once. This allows them to then downsize into homes that more closely fit their retirement needs.
Pulling Back from Risk
Approaching retirement age means pulling back your investment portfolio from high-risk areas. In particular, the stock market can swing aggressively downward in short periods, so move into bonds and other low-risk financial vehicles.