It’s the season for ghouls, goblins, and ghosts because Halloween is right around the corner. It’s time to stock up on candy, carve your pumpkins, and find the perfect costume. It could also be the perfect time to think about financial mistakes that could come back to haunt you in retirement.
Granted, retirement planning may not be your top priority right now. However, you could be making errors in your strategy that may have serious consequences down the road. The earlier you identify those errors and missed opportunities, the sooner you can take action and put yourself on a path toward a successful, stable retirement.
Below are three common planning errors that could create financial fright in retirement. If any of these sound familiar, it may be time to take action. A financial professional can help you develop a strategy to take the terror out of your retirement strategy.
Not using tax-deferred vehicles.
What do 401(k) plans, IRAs, and even annuities have in common? They’re all tax-deferred savings vehicles. This means that you don’t pay taxes on your annual growth as long as the money stays inside the tax-deferred account. Depending on the vehicle, you may have to pay taxes when you take a distribution in the future.
Tax deferral is a powerful compounding tool. Since you don’t pay annual taxes on your growth, that accumulation can compound, possibly accelerating your growth. You may accumulate assets faster in a tax-deferred vehicle than you would in a comparable taxable account.
However, you can’t benefit from tax deferral if you don’t contribute to tax-deferred accounts. Your employer may offer a tax-deferred 401(k) or other retirement plan. Similarly, IRAs offer tax-deferral. You could also use a deferred annuity, which are usually tax-deferred.
Taking on too much risk.
Excessive risk exposure can derail any retirement plan. Unfortunately, risk and return usually go hand-in-hand, so it’s often difficult to completely avoid risk and still hit your growth objectives.
However, there are vehicles that allow for growth potential without exposure to market risk. For example, fixed deferred annuities usually pay a set interest rate over a set period of time. There is no market exposure. Your interest simply compounds through the duration of the contract.
There are also fixed indexed annuities, in which your interest rate is tied to the performance of a market index like the S&P 500. If the index performs well, you may earn more interest in a given period, up to a maximum. If the index performs poorly, you may earn less interest, but you usually won’t lose money. Most FIAs have a principal guarantee* that prevents you from losing money due to market risk. These types of vehicles could help you reduce the amount of risk in your retirement strategy.
Failing to create guaranteed* lifetime income.
A long lifespan is usually a good thing, but it can create scary consequences in retirement. The Society of Actuaries estimates that a 65-year-old couple has a 50% chance of one spouse living to 94 and a 25% chance of a spouse living to 98.1 If you retire in your mid-60s, you could be retired for several decades.
The challenge is making your assets last over that period of time. If you overspend in the early years, you may not have enough assets or income in the later years of retirement. You can avoid this risk by creating streams of guaranteed* lifetime income. For instance, annuities offer a variety of ways to generate income that is guaranteed* for life, regardless of how long you live.
Ready to take the terror out of your retirement strategy? Let’s talk about it. Contact us at Boston Independence Group. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
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Dispatches from basecamp.
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