Importance of Debugging Errors in Retirement Calculations

Regardless of your age or the profession you are in, retirement is bound to come knocking on your door someday. Experts say that the right time to start saving for retirement is the day you earn your first paycheck. Considering that most people start working in their 20s or 30s, it may seem like there’s ample time to save up for retirement, but many people still falter along the way. Some end up miscalculating their retirement requirements, while others keep dipping into their future savings to meet their immediate expenses. There may be many reasons to waver, but ensure that you do not lose sight of these key factors while planning for your retirement.

6 Most Important factors to consider while Planning your Retirement

1. Inflation

Most people tend to exclude the effects of rising prices from their retirement calculations. Inflation affects every product and service in the market. It could be something as routine as buying a loaf of bread, getting a haircut, or something as big as purchasing a house. The Federal Reserve aims for 2% inflation over time. You must understand the implications of these rising costs on your lifestyle and standard of living. Here is a calculator to know how inflation can impact your retirement needs.

2. Taxes

You must have come across terms like ‘tax-deferred’, ‘tax-advantaged’, and ‘tax-free’, while selecting a retirement account. 401(k)s and traditional Roth IRAs are common retirement accounts used by many Americans to save for their retirement. But it is important to understand the tax implications of these accounts and not get swayed by mere terms. For example, in the case of a traditional IRA, your contributions are tax-deferred, and you do not have to pay capital gains tax on the growth. However, your withdrawals are taxable as normal income. A Roth IRA works in the opposite manner, wherein the contributions are taxable, and the returns are tax-free.
In simple words, you have to pay tax either before putting in your money or after withdrawing it. But being able to opt for the option that suits you the best, is what makes a difference. You should also know how penalties for early withdrawals can affect your retirement planning.

3. Expenses

It is impossible to ascertain your future expenses accurately, but putting in a little thought into it can help you in many ways. People generally think of the most apparent expenses in old age, i.e. healthcare, and conveniently replace it with their younger day expenses like commuting to work, education expenses of their children, general socializing, etc. Although touted as the golden years of a person’s life, retirement is a lot more than just playing golf and paying medical bills.
In fact, routines expenditure constitutes the biggest chunk of your bank statements. Buying or renovating a house may cost you a significant amount of money, but you are likely to do it only a couple of times in your entire lifetime. In reality, it is the smaller, recurring expenses that need to be well accounted for in financial plans. Moreover, with 40 being the new 30, and 70 being the new 60, there has been a major shift in how the family’s functions in the current times. Your children could still be young when you retire and may require funds for education. Thanks to globalization, you may have to travel a lot if your children settle overseas. All of these expenses, along with inflation, should be a part of your retirement calculations.

4. Property

Buying property, and particularly a home, is on top of many people’s to-do lists. It is also one of the costliest financial decisions a person can make in their life. Owning your home can bring in a sense of relief and security in some people, and is seen as a comforting financial asset in retirement. Hence, it is important to understand the implications of buying a house so you may make it a part of your retirement calculations. Home comes with many long-term costs, like mortgage and down payments on the loan. The interest rate on a mortgage could depend on how soon you can pay it off, as well as external factors like inflation, property taxes, maintenance costs, etc. If your mortgage is extended to your retirement years, you may have to pay these costs out of your retirement funds. Housing costs, in addition to other retirement expenses and inflation, can catch you off guard if they’re not planned for in advance.

5. Withdrawals

You earn your entire life so you can save up for retirement. But what happens when you actually withdraw this money? While the money belongs to you, the rules and regulations involved can make regular withdrawals a tedious and complicated task. You may have more than one retirement account and will have to make Required Minimum Distributions (RMDs) from each of them after a certain age. On top of your own savings, you will also receive Social Security benefits. Not knowing how to manage all of these accounts can result in taxes and penalties, and ultimately losing a part of your fortune to the state. Unplanned RMDs can move you to a higher tax slab and increase your overall taxes. It is very important to understand the implications of the marginal tax rate on your retirement calculations.

6. Unforeseen events

As important as it is to plan everything in life, there are still some factors that are not only beyond your control but may also be beyond your presumptions. While most people preempt the negative and plan a financial cushion for long-term medical care, accidents, etc., not many people realize that even the positives can have an effect on your retirement calculations. Much like the RMDs, if you were to inherit valuable assets along the way, your tax liabilities will also change. If you are likely to inherit a parent’s or grandparent’s estate, you should understand how it will affect your overall net worth. 

To sum it up

You have your entire life to plan for retirement, which also gives you enough time to educate yourself on how your current planning can affect your future. The world of finance is dynamic, and the only way to ensure a financially secure future is to keep yourself up to date with the changes in market fluctuations and tax regulations. You can’t plan and account for everything, but don’t overlook the things that you can. 

It also never hurts to get a financial advisor’s opinion to know if you are headed in the right direction. These experts can help you build your retirement nest with ease.