By Jess Peterson
Are you approaching retirement and feeling anxious about it? The prospect of giving up your income stream and depending on your retirement portfolio to support you can be daunting. Put your mind at ease by checking in with your financial advisor to avoid these common retirement mistakes.
1. Keeping Retirement Savings on Autopilot
“Put your retirement savings on autopilot.” Sound familiar? It’s practical advice for those starting in the workforce and during the accumulation phase of saving for retirement. Contribute 15% of your pre-tax income to your retirement accounts from day one because you’ll never miss what you didn’t see, or contribute at least enough to benefit from an employer match and increase your deferral by 1% at every raise. Sounds easy enough, but that’s not the reality for most people, based on Vanguard’s How America Saves 2021 report. According to the Vanguard report, average deferral rates have held relatively steady from 2011 to 2020 at around 7%. (1) So, while it appears many investors have indeed set their retirement savings on autopilot, the vast majority haven’t reached the recommended 15% savings rate.
Check your 401(k) or other retirement plan contributions and try to increase your savings going forward. At age 50, you can also make catch-up contributions for 2021 of $6,500 to your 401(k) accounts and an additional $1,000 to IRA accounts. (2)
2. Setting and Forgetting Your Investment Strategy
When’s the last time you reviewed your retirement portfolio’s asset allocation? As you approach retirement, consider shifting your asset allocation to a more conservative portfolio to minimize risk. Keep in mind, though, that retirement could last 30 years, and investing too conservatively in early retirement will sacrifice the growth potential necessary for your assets to last a lifetime. Aim to reevaluate your investment strategy when retirement comes into view and regularly after that.
Target-date funds continually update their asset allocation over time and have emerged over the years as a popular way for do-it-yourself investors to set and forget their asset allocation. According to the same Vanguard report, 80% of participants in a 401(k) or other defined contribution plan invest in target-date funds, and two-thirds of those participants hold their entire account in a single target-date fund. However, there are more variables to consider than simply your retirement date when setting a proper asset allocation. Working with a financial advisor to update your financial plan can help ensure your retirement portfolio’s asset allocation is appropriate for your specific needs and risk tolerance.
3. Withdrawing From Retirement Savings Without a Plan
A real concern for retirees is the risk of outliving one’s assets. Beginning retirement with a distribution plan in place will go a long way in putting your mind at ease. Your distribution plan will serve as a guide as you begin spending down your assets, helping you avoid running out of money. A common rule of thumb is to limit withdrawals to 4% of your portfolio to avoid spending down assets too soon. In reality, determining a safe withdrawal rate is highly nuanced, based on an individual’s specific situation and needs, and requires adjustment over time.
In addition to determining a safe withdrawal rate, consider tax implications when deciding which accounts to withdraw from and when. Neglecting to take required minimum distributions from employer-sponsored retirement plans on time will incur stiff penalties. Additionally, delaying Social Security benefits up to age 70 increases your monthly benefit amount. (3) Careful distribution planning allows you to stretch your retirement assets further, giving you the best chance that your retirement income and portfolio assets will be sustainable throughout your lifetime.
If life took you and your financial plan on a few detours on your journey to retirement, now is the perfect opportunity to get back in the driver’s seat. At Peterson Wealth Management, we’re here to help. Schedule your no-fee consultation now! You may also call our Sparks office at (775) 673-1100 or our Reno office at (775) 423-8007.
About JessJess Peterson is an investment advisor representative at Peterson Wealth Management, an independent, full-service financial advisory firm committed to providing personalized, unbiased advice. With over 12 years of experience, Jess serves his clients by developing strategies for the myriad of financial challenges and opportunities they face as they move through life, educating and empowering them so they can make informed decisions that get them closer to their goals. Jess is known for building strong, long-term relationships with his clients built on trust, and he works tirelessly to reduce their financial stress so they can focus on the things they love. Jess graduated from the University of Nevada, Reno with a bachelor’s degree in economics and political science. When he’s not at work, you can find Jess staying active by running in various events around Northern Nevada and racing motorsports around the country. He enjoys visiting Tahoe, playing hockey, and snowboarding as well. To learn more about Jess, connect with him on LinkedIn. You can also watch his free webinar on 7 Unexpected Risk to Your Retirement (& How to Plan for Them).