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Avoid These 5 Retirement Mistakes

In early 2020 the COVID-19 pandemic hit Germantown hard, and it continues to remain prevalent as we near the end of the year. Whether you’ve just reached retirement, or are planning on it in the next few years, it’s likely the virus has brought about some financial uncertainty regarding your retirement readiness. Before making any sudden changes, it’s important to remain rational and avoid these five big retirement mistakes below.

Mistake #1: Neglecting Your Emergency Fund

No word describes 2020 better than “unexpected.” Because of this, it should come as no surprise that preparing for the unexpected claims the top spot on our list. When times get tough, you may feel tempted to forego or forget important money habits - like continuing to add to your emergency fund. If COVID-19 has affected your income, you may be struggling to make ends meet. That doesn’t mean contributing to your emergency fund should be the first thing to go. A little preparation now can go a long way if an unexpected emergency arises. From surprise health issues to car repairs, you never know what surprises may come your way in retirement.

Mistake #2: Making Unnecessary Withdrawals

Early retirement account withdrawals could mean large tax penalties and less income in retirement. While the CARES Act temporarily waived the 10% penalty for early 401(k) withdrawals (up to $100,000), it is unwise to use this option before considering other alternatives.1 

Traditional IRA withdrawals will still be subject to income tax come 2021. If you’re struggling to cover your expenses amidst the pandemic, talk to your financial advisor about other options you may want to consider rather than looting your future retirement. You could look into what relief programs Maryland or Montgomery County offers, tap into your emergency fund (only if necessary) and reevaluate your budget.

Mistake #3: Making Emotionally-Driven Investment Decisions

These days, you can’t get away from hearing the word “coronavirus.” From social media posts to advertisements and news outlets, there’s no escaping the pandemic. COVID-19 aside, other big news stories are hard to avoid as well - the election, the staggering rates of unemployment claims, the stock market rising and falling, etc.

After absorbing info day in and day out, it’s nearly impossible to not let it affect your money decisions. Should you liquidate your portfolio and bury it in the backyard? Do you need to look at rebalancing assets amidst this market volatility? Working with an investment advisor can bring an objective, education-based perspective to the question of what to do with your assets. Together you can focus less on the world around you and more on your individual goals as you head into retirement.

Mistake #4: Forgetting to Reassess Your Current Budget

When did you last make a monthly budget? Have things changed since then? Maybe you previously commuted to work, and now you’re working remotely. Or you used to spend every Friday at happy hour with friends, now you enjoy a quiet evening at home. It’s very likely that your daily habits, and what you spend money on, have been affected by the pandemic.

In many cases, this could be good news. A lot of people are spending less on gas or commuter passes, travel and vacation, eating out, gyms and more. Look at your spending over the past several months and determine if there are any opportunities to put more toward your retirement savings. Depending on your timeline towards retirement, an extra couple of thousand in savings this year could grow significantly over the coming years.

Mistake #5: Ignoring CARES Act & Other Legislative Changes

The CARES Act was passed on March 27, 2020, meaning you’ve likely heard of it by now. It’s possible you even received a stimulus check in April or May. But did you know that the CARES Act offers some significant changes for retirees and those about to retire?

As mentioned earlier, the CARES Act has waived the 10% tax penalty for coronavirus-related withdrawals from your 401(k) account up to $100,000. 

Those who may qualify for this option include:

  • Someone who has contracted the virus
  • Those caring for an immediate family member who has the virus
  • Anyone experiencing financial distress due to being furloughed or laid off during the pandemic
  • Business owners who needed to cease operation or reduce hours
  • Any additional circumstance in which the IRS deems acceptable1

In addition, required minimum distributions (RMDs) have been waived for the remainder of 2020.1 If you don’t need this money to make ends meet, leave it in your investments for retirement. Plus, your tax obligation will be lower without this additional income.

If the pandemic has created some cause for concern when it comes to your retirement, don’t hesitate to reach out to us! We work with retirees and pre-retirees to develop retirement strategies and determine if things need to be adjusted. 

  1. https://www.congress.gov/bill/116th-congress/senate-bill/3548/text

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.