Whether you are just entering the workplace or nearing retirement, there are a few pitfalls you want to avoid while in retirement.
What are some of the pitfalls that people encounter while in retirement?
1. Understand the taxability of social security
One common myth concerning social security benefits is that they are tax-free, but this is not always the case. Social Security benefits may be taxable depending on your filing status and other sources of income received during the year. It is a good idea to explore tax planning strategies to reduce the taxability of social security.
2. Understand the best time to start your SS benefits
Individuals are eligible to start receiving benefits as early as 62 years of age, but keep in mind if you start early, your benefits may be reduced by a certain percentage until you reach full retirement age. Those who delay social security benefits are expected to receive higher benefits. To get an understanding of what you can expect to receive, there is a great retirement calculator at ssa.gov to help determine your benefits.
3. Avoid tax penalties in retirement
Retirees must begin to withdraw money from their retirement accounts at the age 70 ½, this is referred to as required minimum distributions. Generally, you have to start taking withdrawals from your IRAs or other retirement accounts.
Roth IRAs do not require minimum distributions. Failure to do so by the appropriate deadline can be taxed up to 50% for the amount not withdrawn!
4. Start saving early!
Lastly, I can’t stress enough. Start saving early. If you are a younger person who may have just started a career, you want to make certain you save for retirement. This allows compounding to work on your behalf.
For example, a 20-year-old who starts saving $2,000 per year will have approximately $425,000 at the age of 65, whereas if that same person waits until he is 40 years old and doubles the amount (assuming 6% rate of return) that person will only have approximately $145,000 at the age of 65!