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:
1. Short-Sighted Savings. 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). Consider multiple avenues for your savings dollars, 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.
· Individual Retirement Account (IRA): Many smaller employers offer an IRA option, or you can open your own IRA.
· Personal Savings: Many banks offer automatic direct deposit of paychecks 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.
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. 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 reach retirement age(*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.
4. Debt. 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.
5. Life Events. You can save early and save often for retirement, but something may happen that puts that savings at risk. A whole life insurance policy provides protection for your family if the unexpected happens to you, and it builds cash value over time. Instead of digging into your retirement savings to pay for unforeseen expenses, you may be able to access the cash value(*3) in your whole life insurance policy to cover some of these costs. Or, later in life you may use your cash value to supplement a short fall 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.
*1- Past performance is no guarantee of future investment performance.
*2- U.S. Social Security Administration, The Facts About Social Security’s Disability Program, 2018
*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.
Provided by Jordan Jones, courtesy of Massachusetts Mutual Life Insurance Company (MassMutual)
For more information, please see https://www.massmutual.com/individuals/educational-articles/index