Retirement preparation is generally a process that takes decades to plan. Retirees attend to their savings goals based on their vision for retirement. For example, if they plan to travel around the world, an individual may contribute a higher percentage to their employer-sponsored plan. Retirees who want to stay close to home and help raise their grandchildren may not need as much money to sponsor their retirement dreams.
The recent global pandemic created extensive and far-reaching turmoil throughout the active workforce. In addition to the unexpectedly displaced workers, many individuals found themselves facing early retirement. Premature retirement is not necessarily something that every individual looks forward to or even wants to pursue. There are special circumstances, such as severe health conditions, that make early retirement unavoidable. In anticipation of the financial requirements of a viable retirement, individuals must find ways to make sure their money lasts as long as possible.
Early Withdrawals and Tax Implications
All pre-tax contributions from retirement plans are subject to taxation upon withdrawal. When retirees are faced with premature retirement, they must consider how they will handle the tax consequences. Most qualified retirement plans are subject to a ten percent penalty for early withdrawals or distributions taken before age 59 and one-half. That ten percent can quickly add up and severely impact retirement goals. Planning for retirement requires very careful planning about how much money is being used and how quickly that money is being spent.
Control and Track Spending Habits
One of the biggest mistakes retirees make is spending too much of their retirement savings within the first few years after they stop working. The option to pay all outstanding debts in full can be tempting for retirees who want to experience financial freedom. Unfortunately, high mortgage balances and even multiple credit card balances can deplete retirement savings and leave retirees without adequate funds to maintain their lifestyle. Depending on current interest rates and cost of living increases, conservative investments are not likely to keep up with inflation. That means existing funds will not be worth as much in real dollars as time goes on.