Well, sure, we expect that. But there are also elements in the tax code and in the very nature of money and saving itself that make retirement planning mistakes very difficult and often impossible to undo. Whether you use a plain vanilla, off-the-shelf retirement program or our preferred solution, the Self-Directed IRA, Here are some of the most common:
- Not starting now. There’s always a reason to delay, it seems. But when it comes to retirement savings, your greatest ally is time. Every year, every month, every day you put off saving seriously for retirement in a dedicated tax-advantaged vehicle designed for that purpose is a year, month or day you can never get back again.
Think of it: The annual contribution limit for Self-Directed IRAs, Traditional IRAs and Roth IRAs this year is $5,500. If you don’t make the contribution this year, you don’t get to just double up your contribution next year to make up for the lost year. First, the year’s worth of potential compounding is lost forever. Second, the law doesn’t even allow you to contribute more than that $5,500 that you missed last year. The only exception is if you are age 50 or older, in which case you can contribute an extra grand. Still not enough to make up for the lost year. It’s not even close.
- Borrowing too much. Debt can be a lever when applied to business investment, sure. But when it comes to personal financial planning, it is all too frequently a cancer. Strive to live on less than you make, regardless. If your liabilities are growing faster than your assets, you must act to correct the problem.
We’re not opposed to prudent borrowing to buy assets, where the asset’s expected total return is greater than the interest rate and other costs of carry. But borrowing on credit cards, home equity and out of 401(k) fund a lifestyle you simply cannot sustain on earned and/or investment income alone is not sustainable.
- Making early withdrawals from retirement plans. The tax advantages of retirement plans – whether they are Self-Directed IRAs, Roth accounts or traditional tax-deferred – type balances you usually find in 401(k)s, are powerful indeed. Plus, unless certain circumstances apply, you have to pay an excise tax of 10 percent on most retirement plans if you pull funds out before you turn age 59½ or – in the case of 401(k)s, up to age 55 if you have retired or left the employ of the plan sponsor. If you make early withdrawals from tax-deferred accounts, you are not only paying income taxes (which you would anyway sooner or later), you are also giving up the 10 percent penalty, plus up to 20 percent additional withholding from 401(k) plans, plus the combined benefit of future years of income and capital gains tax deferral.
That’s a big hit, over time. It’s usually worth it to make premature distributions only as a last resort.
- Saving too conservatively. Most of us know not to bet the whole retirement nest egg on a single horse race. That would be crazy. But it’s also crazy to bet your whole retirement lifestyle on the performance of, say, a 2 percent CD or money market or guaranteed investment contract. Inflation continues to eat away at retirement savings over the long haul – and usually at a rate that exceeds the interest rate available on cash. To preserve buying power and get ahead enough for savings to be worthwhile, you must take some risks somewhere.
American IRA helps our clients do that by allowing them to choose to direct retirement investments to the fields they know best, via Self-Directed IRAs, – not just the few ho-hum funds and insurance products that are usually available from investment houses. By focusing on your strengths, you may be able to get better returns for a given amount of risk.
- Relying on Social Security. Social Security is designed merely to be a very last-ditch safety net to prevent senior citizens from becoming absolutely destitute. It would cover only a very minimal existence, if that. Social Security alone does not support a lifestyle many people would freely choose.
If you think you’ve made some mistakes so far, take heart. Almost everyone has slipped up one way or another at some point. Don’t worry about water under the bridge. Instead, give us a call today at 866-7500-IRA (472), and we’ll work together to make the best of things going forward.
We specialize in Self-Directed IRAs, Self-Directed 401(k)s and other retirement accounts. If you believe you can benefit from the additional flexibility and focus on asset classes that Self-Directed IRAs can provide, you may be a great candidate. We look forward to serving you.
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