4 Retirement Mistakes You Don’t Even Realize You’re Making

Setting yourself up financially in retirement should be a rewarding feeling. You've worked for many years, and now it's time to say goodbye to your working life and embrace this next chapter.

As you're saving and investing for retirement, there are some things you can be doing to put yourself ahead, as well as some mistakes that could slow down your progress. Here are four retirement mistakes you probably didn't realize you were making.

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1. Not using a Roth IRA while eligible

A Roth IRA is one of the best resources for saving and investing for retirement. Having your money grow tax-free with tax-free withdrawals in retirement can create wealth-making opportunities and put you in a position to be financially free in retirement. The difference in paying capital gains taxes on six-figure withdrawals in a Roth IRA versus a regular brokerage account can be tens of thousands of dollars for many people.

Unfortunately, not everyone is eligible to contribute to a Roth IRA because of its income limit. If you're single, you can contribute up to the $6,000 limit if you make less than $129,000, with a phaseout range up to $144,000. For married people filing jointly, you can contribute up to the limit if you make less than $204,000, with the phaseout range going up to $214,000.

Take advantage of the major tax benefits that come with a Roth IRA while you can.

2. Maxing out your 401(k) before contributing to an IRA

For tax year 2022, the maximum amount you can contribute to a 401(k) plan is $20,500 ($27,000 if you're 50 or older). For a lot of people, contributing the maximum amount isn't feasible. However, even if you have the means to contribute the maximum, you may find it can be overrated.

When deciding how much to contribute to your 401(k), the minimum should be whatever your employer will match and not a penny less. Once you've set your contributions to your employer match, your next step should be to maximize your IRA contributions.

You'll want to do this for a couple of reasons. First, you may not always be eligible to contribute to a Roth IRA because they have an income limit (traditional IRAs don't have income limits, but they limit deduction ability). IRAs also work like brokerage accounts because you can purchase any stock or fund. Having the freedom to choose whatever investments you want — and not just the ones provided, like a 401(k) — gives you more control over your money and where it goes.

Once you've maxed out your IRA contributions, consider returning to your 401(k) and upping your contributions, if possible.

3. Using target date funds in your 401(k)

When you select your investment elections in your 401(k) plan, you'll notice funds put together with a year in the same, such as ABC Fund 2060. These are target date funds, and the year represents your estimated retirement year.

Target date funds are designed to reallocate as you near retirement, becoming more conservative. The problem with target date funds, however, is that they're actively managed, making them more expensive than passively managed funds.

Instead of spending on the higher target date fund fees, you can invest in the funds typically held within the target date fund. For example, if you're in your mid-30s, your 401(k) breakdown may look like the following:

Large-cap index fund: 60%
International index fund: 20%
Mid-cap index fund: 10%
Small-cap index fund: 10%

The percentages will vary based on your preference, but keep in mind that small-cap and mid-cap funds are riskier, so you'll want to shy away from those as your near retirement.

4. Overestimating how much you'll receive in Social Security

Your monthly Social Security benefit largely depends on when you decide to retire. For people born in 1960 or after, the Social Security considers your full retirement age (FRA) 67. However, you can choose to begin taking benefits as early as 62 or delay them until you reach 70.

If you decide to take benefits early, they're reduced by five-ninths of 1% for each month you claim before your FRA, up to 36 months. If you take benefits more than 36 months before your FRA, any months over 36 will reduce your amount by five-twelfths of 1%.

Here is the maximum benefit by retirement age:

Age 62: $2,364
Age 67 (or full retirement age): $3,345
Age 70: $4,194

Unfortunately, if you're planning to receive the maximum benefit — or close to it — you may want to adjust your expectations. The average monthly Social Security benefit is $1,666. That doesn't mean you won't receive more than that, but the odds aren't in your favor of receiving the maximum.

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