Today I want to share three of the biggest mistakes people can make with their retirement accounts. This isn't just hyperbole: I've seen perfectly smart, capable people make all of these mistakes without understanding the negative impacts. The plus side is that each of these mistakes is easy to avoid!
Whether you want to ditch the workplace for a conventional retirement or just want to keep doing what you love but remove the obligation to earn an income, saving in retirement accounts is a great way to save on taxes while you build long-term financial stability. So if you're an artist and the idea of "retirement" doesn't hold any appeal, reframe it instead as investing money now so you have the ability to choose what to do, when to do it, and with whom to share it as you get older (and save on your tax bill along the way).
Here are three of the biggest mistakes people make when it comes to retirement accounts:
Not contributing at all – saving into retirement accounts doesn't have to be an all-or-nothing proposition. Even if you can't max out your IRA contributions this year, you can still add a little something each month to keep moving in the right direction. Ten dollars a month isn't much, but it's a heck of a lot better than nothing! If you have a workplace 401(k), aim to contribute at least enough to get the full employer match. (It's literally free money.) Pro tip: don't wait to see how much is left over at the end of the month or year before contributing to your retirement accounts. Automate a manageable monthly transfer so that you're always saving at least a little bit.
Keeping a bunch of cash in retirement accounts – while this might seem obvious to some people, there are LOTS of people who think they are investing for retirement only to realize that their money has been sitting in cash the whole time. IRAs and 401(k)s are types of accounts, but they are not actually investments; you have to choose which investments to hold within the account. Cash is useful in a savings account (see below), but it does basically nothing for you in a retirement account. The money in your retirement accounts need to grow faster than inflation, and that means investing it in a mix of stocks & bonds that matches your timeline & risk tolerance.
Tapping retirement accounts too early – retirement accounts give tax incentives to encourage ordinary people to save for the future. One of the trade offs for those tax breaks is that the IRS has strict rules about when you can take money out, and breaking those rules means incurring penalties – on top of any taxes owed. If you take money out of a retirement account at the wrong time, you could end up giving away 30-50% (or more!) in the form of taxes & IRS penalties. How can you avoid this? By keeping at least 3 months' of cash in a savings account. While I want everyone to be a long-term investor, all of your progress will be derailed if you need to sell investments at the wrong time to free up cash. Holding enough cash in a savings account can actually make you a much better investor if it helps you avoid selling too soon.
What do you think? Did I miss any important tips? Any questions about how you can save more for retirement? Send me an email – I'm always happy to have a conversation.
Thanks,
Timothy Iseler, CFP®
Founder & Lead Advisor
Iseler Financial, LLC | Durham NC | (919) 666-7604
Iseler Financial helps creative professionals remove stress while taking control of their financial lives. We'll help identify current your strengths and weaknesses, clarify and refine your long-term goals, and prioritize decisions to improve your financial well-being now and later. Reach out today to take the first step.
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