You must maximize your retirement funds to increase your chances of enjoying a comfortable retirement, so it’s important to avoid unnecessary fees that take a bite out of your nest egg without providing value in return. Consider these five retirement expenses that are generally avoidable if you pay attention and properly plan your finances.
1. Early Withdrawal Penalties – In general, you will incur a 10% penalty if you withdraw funds from your 401(k) account before age 55 or from your traditional IRA before age 59½ – and that doesn’t include the income tax that you must pay on these tax-deferred funds.
Exceptions may apply, such as IRA funds that are drawn out for specific uses like college costs or purchase of a home. In addition, you may draw from a Roth IRA account without penalty as long as you have had the account for a sufficient time and don’t take out more than the amount of post-tax dollars that you contributed. Contact your plan administrator if you are unsure about your options.
2. Required Minimum Distribution Penalties – Traditional IRAs and 401(k) programs force you to withdraw a required minimum distribution (RMD) or face a huge penalty of 50% of the amount that should have been withdrawn but was not. As with early withdrawal, the penalty doesn’t include the income tax owed on that amount.
Plan out your withdrawals so that the minimum required withdrawal amount doesn’t cause tax ramifications – or consider placing some of your funds in a Roth IRA to avoid RMD requirements entirely.
3. Early Enrollment Penalty for Social Security – You can draw Social Security benefits as early as age 62, but your benefits will be reduced if you retire before your full retirement age (FRA), which is age 67 for those born in 1960 and later. By drawing at age 62, you decrease benefits by 30% if your FRA is 67 and by 25% if your FRA is 66. That benefit reduction is permanent unless you change your mind within 12 months of signup, repay the benefits already received, and withdraw your application.
Conversely, by waiting beyond your FRA to claim benefits, your monthly benefits can increase by 8% per year until age 70. The longer you can wait, the higher your monthly benefits will be.
4. High Expense Ratios – Do you know how much you pay in management fees for your investments? If not, you aren’t alone. According to a recent survey conducted by the Pew Charitable Trusts, one third of respondents weren’t familiar with the fees in their retirement accounts, even though disclosure of fee information is required.
Consider that a 1% decrease in fees on a $100,000 investment portfolio can gain you over $320,000 over 30 years, assuming a 10% return on your investment.
It’s possible that an actively managed fund with higher fees can produce returns that are greater than the costs – but if you choose to invest in a fund with higher fees, make sure you are getting sufficient return value to make the fees worthwhile.
5. Late Medicare Enrollment Penalty – If you have not started drawing Social Security benefits by age 65, you must sign up for Medicare Part B within the proper deadline to avoid significant penalties. You have a seven- month initial signup period, beginning three months before you turn 65. Part B premiums permanently increase by 10% for every 12-month period that you delay signup past your eligibility point. If you are beyond age 65 but covered by an employer with group health coverage, you must sign up within eight months of leaving that job to avoid penalties. Details are available at Medicare.gov and AARP.org.
Your retirement account is always subject to forces that you can’t control, such as inflation that eats away at your future purchasing power and economic downturns that reduce the value of your stock holdings. Don’t add to the problem by incurring fees that are both unnecessary and detrimental to your retirement plans. Otherwise, you may end up scaling back your retirement goals a bit, or working longer than you expected to achieve those goals.
Let the free Retirement Planner by MoneyTips help you calculate when you can retire without jeopardizing your lifestyle.