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How to avoid sabotaging yourself when it comes to money and retirement

11/23/2020, 9:16 p.m.
Creating a secure retirement often comes down to smart planning as you consider saving and investment options, and choose the ...

Creating a secure retirement often comes down to smart planning as you consider saving and investment options, and choose the ones most likely to help you meet your goals.

But not everyone makes wise choices, and financial missteps can play a significant role in how much – or how little – you have stashed away once retirement arrives, says Toby Mathis, tax attorney and founding partner of Anderson Law Group

"Most people know they need to save a sizable amount for retirement, but many Americans are still woefully unprepared as they begin to near retirement age," Mathis says. "In fact, some estimates suggest that as many as 50% of U.S. households are at risk of not having enough money to fund their retirement needs.

"There may be a number of reasons for that, but one of those reasons is that people often sabotage their own finances by making avoidable mistakes."

He says a few ways they do that include:

• Failing to start building a nest egg – now. A significant retirement nest egg takes years – even decades – to grow, so the first step is to make a commitment to saving money every month, Mathis says. The younger you are, the better. "If you work for a company that provides a 401(k) and matching program, take advantage of that free money," he says. "That compound interest can make your money grow exponentially, so the more money you put into your retirement account now, the bigger your nest egg will be in the decades to come."

• Paying higher taxes than necessary. While the country needs tax money to function, there's no need for any individual to pay the IRS more than they owe, Mathis says. One easy way to reduce your tax bill is through contributions to a tax-deferred account, such as a traditional IRA. "With an IRA, for example, you can deduct your contributions each year when you file your taxes," he says. "Also, the money you put into tax-deferred accounts won't become taxable until you are 72 or whenever you begin making withdrawals; whichever comes first." A good advisor can help with other tax savings, Mathis says.

• Investing in rental property without understanding the drawbacks. Plenty of people do well by becoming landlords, but there are also pitfalls, such as paying too much for property or not taking into account all the related expenses. For many people, stocks, bonds and other investments are a better bet. "I'm not saying not to invest in real estate," Mathis says. "I'm just saying not to start with it if you're a first-time investor with a tight budget."

• Not knowing Social Security is taxable. The Social Security Administration provides Americans with an estimate of what their benefits will be. That helps you calculate how much additional money from other sources you will need to maintain your lifestyle. But what many people fail to account for is that it's not guaranteed every penny of Social Security checks will go into their pockets. "Depending on your overall income, as much as 85 percent of your Social Security benefit can be taxed," Mathis says. "You need to be aware of that when budgeting for retirement."

"Most Americans will need to retire at some point, and they will need money set aside so they can achieve financial independence during the last years of their life," Mathis says. "It's crucial that you don't sabotage yourself because building a sizable nest egg is not a luxury. It's a necessity."