Retirement planning mistakes you make and don’t even know it

It’s easy to overlook these simple miscues that could be costly

It’s no surprise that many of us are not financially prepared for retirement.

For those who do have a retirement plan — and for those who plan to have one soon — there are a lot of factors to consider. What’s the right amount to save? How long do I need to save? When should I plan to retire?

Focusing too much on the big picture can make it harder to consider all the small factors that will have an effect retirement plans. Just a few simple mistakes could be costly, so here are a few to correct before it’s too late.

Update your contributions

If you already put part of each paycheck toward your 401(k), kudos! But if you choose a static amount to contribute and never change it, consider a few options.

To make the most of your 401(k) contributions, be sure to update the amount you contribute when financial changes occur in your life. For example, if your paycheck increases, you should also raise your contribution.

Some employers will let you to contribute a fixed percentage of your wages; when you get a raise, your 401(k) contribution automatically goes up. That can make it easier to contribute more, but don’t assume you shouldn’t update your contributions when you can (example: if you’re earning income from a side job or if you get a bonus at work). Aim for 10-15 percent of your wages. That may not be affordable for everyone, but at the very least contribute enough to earn the employer match (if there is one).

An extra $75 per month over 10 years might not seem like a big difference, but it would amount to almost $40,000 in total savings by the time you retire. And if your employer offers matching 401(k) contributions, any additional money you save will have an even greater impact. For example, if your employer offers a 100 percent investment match, your monthly contribution would be doubled.

Don’t always rely on retirement calculators

Retirement calculators offer a general overview of how much to put away for retirement, but it’s not as simple as it might seem.

Every retirement calculator is different, and each one could provide a very different result even by using the same information. For example, inputting an identical set of sample numbers, the Motley Fool retirement calculator said that a given retiree would need $1 million for retirement. According to Merrill Edge’s calculator, the total was $1.3 million for that same person based on the same numbers. AARP’s retirement calculator said $729,802 for the same person.

None of these calculators are right or wrong — they just use their own method of producing a retirement financial goal. For example, both AARP and the Motley Fool calculators allow information about Social Security in the calculations; Merrill Edge does not. And Merrill Edge asks about investment strategy, but the other two don’t consider that.

If you’re feeling overwhelmed by retirement planning and aren’t sure where to start, retirement calculators are a great tool. Just be sure to use multiple calculators to provide a range of numbers instead of putting full faith into one calculator.

It’s also worthwhile to chat with a financial advisor. Calculators are good with numbers, but they usually don’t consider the human equation. Advisors can discuss factors that will impact your savings, such as health concerns or plans to relocate.

Take taxes into consideration

Unless you have a Roth IRA or Roth 401(k), you will owe income taxes on the money you withdraw after retirement. Planning for these expenses will help you avoid an unwanted surprise when taxes come due.

As you try to determine which types of income are actually subject to tax, remember that income from Social Security usually isn’t taxed unless you have other sources of taxable income (pension, annuity, income from rental properties, or tax-deferred retirement accounts count as taxable income). In those situations, you could be required to pay tax on up to 85 percent of your Social Security income.

For other types of retirement income, including income from a traditional IRA or 401(k), income tax will be required on any withdrawal. The amount of tax will depend on how much you withdraw, along with your deductions and your tax bracket. The amount probably won’t be drastically different from what you pay now in taxes unless your income is considerably different during retirement. But remember that taxes will follow you into retirement even though you’re no longer working, so it’s an expense to consider.

When you’re planning for retirement, it may seem like there are a thousand things you need to consider. It’s easy to feel overwhelmed by it all, but if you have questions, please contact a Kraft Asset Management LLC representative. We’ll be glad to assist you.

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