We’re continuing our missing to help all ages with their money. Doesn’t matter if you’re a teenager, in your 20s, 30s, 40s, 50s, or retired. Everyone is at different stages in life and in financial security. We already showed those of you in your 50s how to invest, so now it’s time to make sure you’re not making certain money mistakes that will cause you financial pain as your retire.
Your 50s are often the last full working decade you have before you reach retirement. The good news is that your salary is probably the highest it has ever been. That’s why it is so important to come around that last turn prepared for the final sprint. So you don’t get tripped up in the, here are a few money mistakes to avoid. These mistakes can hurt much more than if they’re made when younger, so we also provided some solutions for you to help you get back on track.
Borrow from your 401k
Pitfall: People who need quick access to cash and do not want to go through a bank will borrow from the 401k. Until the loan is repaid, all contributions repay the borrowed balance and you miss out on any market gains.
You can take out a 401k loan for just about any reason. Whether you borrow to buy a house, pay for your child’s college degree, or refinance your credit card debt, a 401k loan is almost never a good idea. As compound interest is so important to reaching your retirement goals, a 401k loan means you pay interest instead of earning interest.
Solution: Look at pulling from your savings or applying for a traditional bank loan first (check out Sofi). The interest rate can be lower than the market return, meaning you lose money by raiding your 401k.
Saving for Retirement Like a Cash-Strapped 20-Year-Old
Pitfall: A 2015 study showed that the median retirement savings account for Fiftysomethings is only $117,000. That’s only $310 in monthly distributions once you retire.
You will make several adjustments as you invest in your fifties. For starters, you will need to shift to a more balanced portfolio that holds more stocks to reduce volatility in your final working years.
When you turn 50, you can also make additional catch-up contributions. The amounts for 2017 are $1,000 extra for IRAs and $6,000 for 401k plans. Every extra dollar you invest means more opportunities to earn interest. Find out how a penny can turn into $10 million!
Solution: Contribute as much as possible to your retirement accounts. Make it a goal to max out your 401k and IRA plans. Max out the catch-up contributions as well. Personal Capital and Betterment both offer free retirement calculators and managed investment accounts when you want an extra set of eyes on your money.
Delaying Retirement to Pay Your Child’s College Tuition
Pitfall: Parents stop contributing to their retirement plans to pay for the child’s college tuition instead. This can cause you to delay retirement if you cannot afford to retire on-time.
While you should help pay for your child’s college education as much as possible if you can afford it, don’t reduce your retirement savings and potentially delay your retirement to make ends meet.
You cannot predict the future and may be forced to retire early for a variety of reasons. Depending on how much you saved for retirement before starting to pay for college, you might have to delay retirement until your 70s.
Solution: Use the free financial planning tools at Personal Capital to determine how much you can contribute to your child’s college tuition and still accomplish your retirement goals. Your child will have 40 years to save for their retirement after they graduate college and your children can accomplish their financial goals much quicker by starting to invest in their 20s and avoiding these five money mistakes.
Paying Off Mortgage Before Other Loans
Pitfall: A goal for many near-retirees is paying off their home mortgage before they retire. But, they also have other loans with higher interest rates still outstanding and pay more in total interest.
Repaying your home loan might be your #1 debt payment priority before you retire since it is your largest loan. What you might not realize is that credit card debt, personal loans, and student loans oftentimes have higher interest rates than your mortgage.
Your monthly mortgage payment might be larger than your other loan payments, but, the interest payment is smaller in proportion because of the lower interest rates.
Solution: Make it a goal to be debt-free before you turn 60 so you can save every possible dollar in your 60s. Follow the debt snowball or debt avalanche repayment strategies to pay off your loans quicker than before. Or, consider taking the Debt Free in 18 Months Course.
Rolling Over Your 401k Too Soon
Pitfall: If you can afford to retire early in your mid-50s, you can make penalty-free 401k withdrawals from ages 55 to 59 ½. Rolling over your 401k means you will have to pay the 10% early withdrawal fee until you reach age 59 ½ if you withdraw during those “gap years.”
You might choose to roll your 401k into an IRA to have all your retirement money in one place and save money on recordkeeping fees that 401k plans charge every year the account remains open. This little-known “loophole” can help you retire early if you have been blessed with a large nest egg.
Solution: If you can retire in your mid-50s, keep your employer 401k open to make withdrawals without paying the 10% early withdrawal penalty. You will still want to consider rolling over any 401k plans from your former employers into an IRA to keep your account maintenance costs as low as possible.
Not Contributing to an HSA
Pitfall: Another pretax contribution you can make are HSA contributions that can be used for almost any medical-related expense.
If you have a high-deductible health insurance plan, you can qualify for an HSA. Your insurance provider might offer one and a few banks also offer HSAs. The annual contribution limit is $3,400 for individuals and $6,750 for families. Once you reach age 55, you can also make a $1,000 catch-up contribution.
Solution: Qualified medical expenses include purchasing contact lenses, prescription medication, medical visits and exams, and hospital services. If this is money you are going to spend anyways, contribute it to an HSA first and pocket the tax savings.
Your 50s are your final full working decade. While you can plan on delaying your retirement to get your finances in order, dedicate as much of your salary to pay off your debts as soon as possible and also contribute to your retirement accounts. When you no longer work, you depend on your retirement account to work for you. Give it the money it needs now so it can give you the money you need later.
Not Sure How to Start Investing?
I opened up my first investment account back in 2012 after paying off a lot of debt. That account was with Betterment. Since then, I haven’t looked back. I love the simplicity and ease of use they provide. I think their system is good for any type of investor. If you want to get into investing, check out Betterment.