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Are You Prepared For Retirement.
Planning and saving for retirement is one of the most
important financial concerns an individual will be confronted
with. Unfortunately, all too often, the basic fundamentals of
retirement planning are overlooked.
Consider ten common retirement planning mistakes that may
prevent you from having the retirement you’ve envisioned:
1. Not taking advantage of employer-sponsored
Participating in an employer-sponsored retirement plan,
such as a 401(k), is a convenient way to build your nest egg. 401(k) contributions are automatically deducted from
your paycheck before taxes are withheld, thus reducing your overall taxable income. In 2014, you can contribute
up to $17,500 to your 401(k), and if you’re age 50 or older, you can make an additional “catch-up" contribution
of $5,500. And to make retirement saving even more attractive, many employers offer matching contributions,
often a percentage or dollar match of the employee’s contribution. If your employer offers a match, and you’re not
contributing at least enough to earn it, you’re turning down free money.
2. Cashing out your 401(k) when changing jobs.
When changing jobs, you’ll likely be faced with a few options regarding your 401(k), such as leaving it where it is,
rolling it over to your new employer’s plan, or rolling it over to an IRA. Regardless of which route you take, possibly
the worst thing you can do is to receive your funds in cash. While cashing out gives you immediate access to your
money, you will not only forgo any potential tax-deferred growth your assets could have generated, you could also
be faced with a hefty tax bill. If you cash out prior to reaching age 59 ½, your distribution will be subject to both
ordinary income taxes and a 10% early withdrawal penalty (some exceptions to the 10% penalty may apply, most
notably if you are age 55 or older at the time of termination of employment). In addition, your former employer is
required to withhold 20% of the distribution for federal taxes, further reducing the amount you stand to receive.
The 20% withholding (but not the 10% penalty) will be counted against your income tax due or toward any refund
when you file your tax return.
Decisions to roll over or transfer retirement plan or IRA assets should be made with careful consideration of the
advantages and disadvantages, including investment options and services, fees and expenses, withdrawal
options, required minimum distributions, tax treatment, and your unique financial needs and retirement planning.
You should consult with your tax advisor regarding your particular situation as it pertains to tax matters.
3. Assuming Social Security will take care of your needs during retirement.
While Social Security was never intended to serve as the sole source of income for retirees, for many people, it
does just that. The Social Security Administration estimates that Social Security replaces about 40% of the average
wage earner’s income at retirement. Can you afford to live on 40% of what you’re currently earning. Probably not.
Most professionals suggest viewing Social Security as a supplement to your personal retirement funds rather than
the other way around. As a general rule of thumb, you should plan to replace 70% to 80% of your preretirement
income in order to maintain a comparable standard of living once you’ve stopped working. Therefore, saving for
retirement is critical.