Whether you’ve been working hard for 30 years or are just three months into your first job, it’s always wise to plan ahead for retirement. After all, one day you will close the chapter on your career and start the next adventure. But what you get out of tomorrow depends on what you put into it today — and how you handle any bumps along the way.
So, while you’re keeping one eye on that retirement prize, make sure to keep the other on the lookout for pitfalls, like:
1. Short-Sighted Savings
This is where proper planning plays a big part. Savings generally take time to grow, so you may wish to consider saving and investing early to take advantage of compound interest and long-term stock gains if the U.S. stock markets continue their historical upward trend.1 Also be sure to consider multiple avenues for your savings dollar, including:
401(k) ― Employer-sponsored 401(k) plans can often be a good way to invest in your future. Many employer-sponsored plans also offer a matching contribution feature. 401(k) plans typically enable you to make contributions out of your paycheck on a pre-tax basis, so you can defer taxation on your income while growing your retirement savings on a tax-deferred basis (Calculator: How much to save for retirement?).
Individual Retirement Account (IRA) ― Many smaller employers offer an IRA option, or you can open your own IRA. Under current regulations and subject to certain conditions, traditional IRA contributions are generally tax deductible for the year you make the contribution, while withdrawals in retirement are generally taxed at ordinary income tax rates.
Personal Savings ― Many banks offer automatic withdrawals from a direct deposit paycheck into a savings account. Even though these banks credit your account with low (or no) interest — and thus offer limited growth potential — this can generally be an easy and conservative way to set aside cash on a regular basis. (Ultimate savings guide)
So how much money do you need to save for retirement? Well, the answer is different for everyone. Individual risk tolerance goes a long way in determining how — and how much — to save. Use a retirement calculator to help estimate your future financial needs and then talk to a financial professional to develop a savings strategy tailored for you and your specific circumstances.
2. Career Interruptions
In today’s economy, you can never be sure of your job stability — or of your ability to quickly find a new job if you get laid off. That’s why many believe it’s critical to maintain an emergency fund to cover 6-12 months of living expenses like rent or mortgage and groceries. (Learn more: Building emergency savings)
If you withdraw money from your retirement savings, especially a qualified retirement plan, you may incur tax penalties on the withdrawals (depending on your circumstances) while also cutting into the account’s value over time.
3. Unforeseen Illness or Injury
According to the Social Security Administration, about one in four 20 year-olds working today will become disabled before they retire. 2 It’s a startling statistic with serious consequences. If you get sick or hurt and have to go on long-term disability (generally after six months of short-term disability), your employer may have the right to terminate your position — and with it, your ability to continue contributing to your 401(k). This can potentially have a considerable impact on your retirement savings. (Disability financial impact calculator)
Many people who become too sick or hurt to work are forced to tap into their retirement savings to meet the expenses of everyday life. A disability income insurance policy not only helps replace a portion of your income when a disability occurs (assuming certain conditions are met), but it can also be designed to help you continue saving for retirement. (Related: Is disability income insurance worth it?)
From credit cards to home loans to paying off your children’s college education, debt has the potential to derail your retirement plans. Debt, when not properly managed, may lead to low credit scores, a depletion of your retirement savings, or even bankruptcy. Unmanaged debt may also make achieving your foundation of retirement planning — the accumulation of assets — more difficult and potentially more expensive. The key is to pay down debt while properly balancing it with your other financial priorities.
You can save early and save often for retirement, but something may happen that puts that savings at risk. Maybe your daughter’s college scholarship falls through. Or your aging father suddenly needs full-time care. Or your home value unexpectedly declines when you are ready to sell. At that point, you can either toss up your hands and say “That’s life!” (and it certainly is), or you can be thankful you prepared for this obstacle.
Consider planning for the unexpected with a whole life insurance policy that builds cash value over time. Of course, one of the most important parts of life insurance is the death benefit, which protects your loved ones by providing a financial benefit when you die. But, instead of digging into your retirement savings to pay for unforeseen expenses, you may be able to access the cash value in your whole life insurance policy to cover some of these costs.3 Or, later in life you may use your cash value to supplement a shortfall in your retirement income.
Taking the steps ahead of time to prepare for potential and real obstacles can help you enjoy life’s next adventure — retirement.
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This article was originally published in February 2017. It has been updated.
1 Past performance is no guarantee of future investment performance.
2 Social Security Administration, Fact Sheet, 2020.
3 Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.