Retirement Planning Mistakes That You Probably Do not Realize

Although retirement can be a rewarding time in people's lives, it can also be stressful.

This is especially true if you are the victim of the following errors, so be sure to avoid them at all costs.

1. To rely too much on social security

Millions of older people receive social security in retirement and these monthly payments play a vital role in helping beneficiaries cope with their expenses. But if you plan to live only on social security at the end of your career, you make a big mistake.

Contrary to what you may have been led to believe, Social Security is not designed to replace your old paycheck. If you were an average income, these benefits will translate into about 40% of your previous income. If you were a higher income, they will replace an even smaller percentage.

Since most seniors need more than 80% of their previous earnings to live comfortably, you will need to take steps to earn income other than social security. For the most part, this means funding a retirement plan like an IRA or 401 (k) during your working years, but it can also mean working part-time in retirement, renting your home as other opportunities . The key, however, is to recognize that even though social security will help you pay the bills in retirement, it will not be enough to fund your golden years by itself.

2. Assuming your cost of living will drop dramatically

Many people assume that once they retire, their living expenses will decrease as if by magic. But chances are your monthly bills will not change as much once you stop working.

Think of the things you are spending money on today, such as housing, food, utilities, and clothing. These are all things you will continue to need when you are older and whether you are working at that time or not. You may even find that some of your expenses increase in retirement, such as health care and recreation.

In fact, the Employee Benefits Research Institute found last year that about 46% of households spend more, not less, in their first two years of retirement, while 33% spend more for their six first years. To avoid financial hardship later in life, develop a retirement budget that accurately reflects the costs you will face and make sure that the income you expect is enough to support it. Otherwise, you may consider postponing your retirement until you are in a better place financially.

3. Not taking advantage of catch-up contributions

Many workers lose their retirement savings in the early stages of their careers when student loan repayments, housing costs and other expenses take up most of their income. Fortunately, people aged 50 and over have the opportunity to make up for lost years of savings in the form of catch-up contributions.

If you save in an IRA and are at least 50 years old, you can currently invest an additional $ 1,000 a year for an annual total of $ 6,500 (under 50 can only contribute $ 5,500). If you save in a 401 (k), you can make a $ 6,000 catch-up contribution for an annual total of $ 24,500 (compared to $ 18,500 for younger workers).

Unfortunately, many people do not benefit from catch – up contributions and, as a result, end up falling as they reach the golden age. In fact, according to Vanguard data, only 14% of the 401 participants aged 50 and over made catch-up contributions in 2017.

If you are late on your savings, it is imperative that you take the necessary steps to make up for your savings, whether by reducing your expenses to free up money or by taking a secondary job and using its product for finance your retirement plan. Otherwise, you risk a major disappointment when your golden age arrives and you realize that you do not have enough money to do the things you have always dreamed of.

4. Forgetting taxes

Between your Social Security benefits and your nest egg, you could end up with a healthy income stream in retirement, especially if you have saved well. But do not assume that all this money will be yours. Chances are, the IRS will also be entitled to its share, especially if your retirement income is important.

There are many ways to impose yourself on retirement. First of all, unless you have a Roth IRA or a 401 (k), the egg withdrawals from your nest will be taxed as ordinary income, which means your highest rate possible. The same goes for many types of pensions. In addition, if your income exceeds a certain threshold, you could be taxed on 85% of your social security benefits. Finally, just as interest and investment income are taxable during your working years, they are also subject to tax during retirement.

The delivery? Be sure to consider the taxes in the composition when calculating your early retirement income. If you plan to withdraw $ 30,000 a year from your 401 (k) and you expect your regular income tax rate to be 25%, you'll only get $ 22,500 and plan your expenses accordingly.

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The more you think about retirement planning, the better you will be when your golden age finally arrives. Avoid these mistakes and prepare for a financially secure future.

CNNMoney (New York) First published on September 21, 2018: 9:49