Personal Finance

Don't Make This Retirement Mistake in 2016

Image: Pixabay

The biggest retirement mistake you can make is one that can leave you ill-prepared and underfunded for retirement, and it's this: Neglecting to have and to carry out a retirement plan. After all, retirement is a period that can last 30 years or more for many of us, and if you're just leaving things to chance or are socking some dollars away and hoping that will be enough, you're endangering your future.

Get a plan

If you don't have a plan for how you'll live in retirement, you're not alone. According to the 2015 Retirement Confidence Survey, only 48% of Americans surveyed (or their spouses) have taken the time to estimate how much money they need to sock away for retirement. We all need to determine how much money we'll need in retirement, how much we can expect from Social Security and other sources (the average Social Security retirement benefit was recently $1,338 per month, or about $16,000 per year), and how much we'll need to accumulate .

If you believe that you'll need $60,000 in annual income in retirement and you're expecting $25,000 from Social Security, you'll need to figure out where the other $35,000 is coming from. It could be a pension, an annuity, dividend income, interest from savings, something else, or some combination of these sources.

Devise your retirement plan -- and then take action. Image: Pixabay

The big picture

As your plan is taking shape, make sure you're looking at the big picture. If you're carrying high-interest rate debt, such as that from credit cards, you will need to pay that off as soon as possible, before you really start investing. Otherwise, you'll likely be paying more in interest than you earn on your investments, and will fall behind rather than getting ahead. Along the same lines, be sure to establish and fund an emergency fund, lest some unforeseen event such as a job loss or major health expense derail you financially.

Once you're out of debt and with an emergency fund, it's time to be saving aggressively and investing effectively. Here's why being aggressive is powerful: If you sock away $5,000 per year for 25 years and it grows by 8% on average, you'll end up with about $395,000, which is pretty good. But if you were able to sock away $6,000 each year, just $1,000 more, you'd end up with $553,000 -- almost $160,000 more! Here's why investing effectively is important: If you socked away a full $10,000 each year for 20 years and earned an annual average of 5%, you'd end up with $347,000. If you earned an annual average of 8% instead, you'd end up with $494,000 -- almost $150,000 more.

You can aim for solid returns over the long haul by putting much or all of your long-term money in the stock market -- perhaps via one or more inexpensive, broad-market index funds, such as the SPDR S&P 500 ETF , Vanguard Total Stock Market ETF , or Vanguard Total World Stock ETF .

Use available tools

As you save and invest for retirement, take advantage of available retirement saving tools, such as IRAs and 401(k)s.

There are two main kinds of IRAs -- the traditional IRA and the Roth IRA. With a traditional IRA, you contribute pre-tax money, reducing your taxable income for the year, and thereby reducing your taxes, too. (Taxable income of $70,000 and a $5,000 contribution? Boom -- your taxable income for the year is now $65,000.) The money grows in your account and is taxed at your ordinary income tax rate when you withdraw it in retirement.

Invest aggressively and effectively and your money can grow a lot. Image: Pixabay

With a Roth IRA, you contribute post-tax money that doesn't reduce your taxable income at all in the contribution year. (Taxable income of $70,000 and a $5,000 contribution? Your taxable income remains $70,000 for the year.) What's the point of the Roth, then? This: Your money grows in the account until you withdraw it in retirement -- tax free . IRA contribution limits for both 2015 and 2016 are the same: $5,500. There's also an extra $1,000 "catch-up" contribution permitted for those age 50 or older, letting those folks sock away as much as $6,500 for the year.

401(k) plans are more generous, with contribution limits of $18,000 for most of us, plus $6,000 for those 50 and older. A 401(k) plan will typically offer a limited menu of investment options for your money, but there's likely a simple index fund or two among them. A key benefit of 401(k) is that often feature matching funds contributed by your employer -- that's free money, so be sure to contribute at least enough to max that out.

One way or another, you need to figure out how much you'll require in retirement and how you will amass that. Develop your plan and start executing it in 2016 and your retirement will likely be a more comfortable and secure one.

The $15,978 Social Security bonus most retirees completely overlook

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The article Don't Make This Retirement Mistake in 2016 originally appeared on

Longtime Fool specialistSelena Maranjian,whom you canfollow on Twitter , owns no shares of any company mentioned in this article.Selena Maranjian has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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