As retirement approaches, many individuals are at risk of financial missteps that could jeopardize their future security. Renowned financial expert Suze Orman has identified several common traps that people nearing retirement should be aware of to avoid significant setbacks.
Claiming Social Security Too Early
One of the most critical mistakes is claiming Social Security benefits before reaching full retirement age. According to the Social Security Administration, benefits are designed to replace approximately 40% of a worker’s income. The full retirement age is set at 67 years old, but individuals can begin receiving benefits as early as 62. However, starting benefits early reduces the percentage received, while delaying benefits until age 70 increases them by up to 8% per year.
Orman emphasizes the importance of this decision, stating, “Everybody thinks Social Security isn’t going to be there. Everybody is scared to death, but I wouldn’t be.” By opting for early benefits, retirees forfeit a substantial increase, which can significantly impact their long-term financial health.
Insufficient Savings Among Baby Boomers
Research indicates a concerning trend among Baby Boomers, with approximately two-thirds lacking adequate retirement savings. Robert J. Shapiro, a co-author of a study on retirement readiness, highlighted that “a majority will find themselves with inadequate resources for retirement.” This situation diverges sharply from the traditional American dream of a comfortable retirement.
Orman also warns against becoming too reliant on government benefits, advising individuals to take advantage of savings vehicles such as the Roth 401(k), 403(b), or Roth IRA. These options allow for tax-free growth and withdrawals in retirement, which can enhance financial security.
Missing Required Minimum Distributions
Another potential pitfall is failing to withdraw Required Minimum Distributions (RMDs) after turning 73 years old. The government mandates these withdrawals to ensure tax collection on retirement accounts. The first RMD must be taken by April 1, 2026, for those turning 73 in 2025. Missing this deadline can result in steep penalties, potentially reaching 25% of the undistributed amount.
Staying in regular contact with a financial advisor can help individuals navigate these requirements and avoid costly mistakes.
Borrowing from Retirement Accounts
Many individuals contemplate taking loans from their retirement accounts, which can severely undermine their long-term savings. Orman cautions that this approach sacrifices the tax-deferred growth of retirement funds. Approximately 33% of middle-class Americans withdraw retirement savings early, jeopardizing their future financial stability.
Additionally, withdrawing funds from a 401(k) before reaching 59.5 years old incurs penalties, which can diminish the overall value of retirement savings. The temptation to eliminate debt using retirement funds can lead to significant financial repercussions.
Neglecting Employer Contributions
Failing to maximize employer matching contributions is another common oversight. Many employees do not contribute enough to their 401(k) plans to qualify for employer matches, effectively leaving free money on the table. If an employer matches up to 6% of an employee’s salary, individuals should aim to contribute at least that amount.
For instance, if an employee earns $100,000 annually and the employer matches 50% of contributions up to 5%, this could result in a combined annual savings of $7,500. Over several decades, this strategy can lead to substantial retirement savings.
In summary, while no one is flawless in managing their finances, avoiding these common pitfalls is essential for securing a stable retirement. Engaging with a knowledgeable financial advisor can provide valuable insights to help individuals navigate these challenges and build a prosperous future.
