Retirement Savings: 7 Money Moves To Avoid With Your Pension
Written by
Aja McClanahan
Edited by
Cory Dudak
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
As retirement becomes more imminent, you’ll want to understand how your pension and other sources of income will work together in your golden years.
It’s not uncommon for retirees to reach retirement age only to encounter financial surprises they hadn’t prepared for or understood prior to their retirement date. However, this doesn’t have to be the case for everyone.
Lanesha Mohip, Corporate Finance and Accounting Consultant and owner of Polished CFO Suite, recommended, “Getting into the habit of consolidating all financial documents, including your pension forms, statements and contacts, to manage your assets more effectively. You want to be aware of changes in management, cost of living adjustments and access to assets as you are nearing retirement age.”
Keep reading to learn about moves to avoid with your pension.
1) Not starting early enough
The later you start a job, the less your potential pension payment. Although some jobs, especially public sector and union positions, offer generous pensions for people who start with the organization later in life, you shouldn’t depend on this possibility.
If you want your pension to cover your living expenses sufficiently, start with your employee offering a pension plan sooner than later.
How to fix: If you start with your employment later in life, explore additional income streams to supplement your income.
2) Making early withdrawals from your pension account
Some employers allow employees to withdraw or borrow funds from their pension accounts. Accessing pension funds earlier than retirement could trigger tax liabilities and reduce the income you have to live on in retirement.
How to fix: This mistake may not be especially detrimental if the funds can be used to generate more income. If you can generate more returns on this money through real estate investing or starting a business, you could come out ahead to cover taxes and future living expenses. Carefully review your numbers, potential and risks before proceeding with the course of action.
Mohip added, “If the plan is to draw down income from the pension in retirement, it is best to calculate the math on prematurely withdrawing money or looking at a more liquid area of your portfolio to withdraw cash from.”
3) Forgetting about pensions from past employers
If you’ve been fortunate enough to work for different companies with a pension plan, there’s a chance you’ve forgotten about your pension benefits and could forget to claim them by the time you retire.
You don’t want to miss out on a steady income in retirement if you don’t have to. Be sure to educate yourself about your options in this scenario.
How to fix: Speak with the pension plan administrators of prior jobs to determine how and when you can access your funds. Sometimes, you can transfer them to a new employer or cash out altogether.
4) Not understanding tax implications
If you’ve been especially savvy with your finances, you could end up with multiple sources of income in retirement. You may find yourself in an entirely new tax bracket with a higher income once your pension is added to the equation. You don’t want your extra income to be wiped out by more tax liabilities, so planning ahead to avoid this mistake will be key.
Ronnie Goode, a CPA based out of Richmond, Virginia and owner of Rhythm Accounting Services, explained further: ” Since most pensions are funded with pre-tax dollars, in retirement, you’ll pay taxes on that income based on ordinary income tax rates on the federal side. Keep in mind that on the state side, you may not have to pay taxes on your income, but it depends on the state.” He added, “Consider all of your retirement income sources to help determine your liability in retirement.”
How to fix: Consult with a CPA periodically to check out how your assets and potential retirement income are trending as you near retirement. Make plans to offset higher tax liabilities with effective tax reduction strategies.
5) Depending solely on pension income for retirement
Depending solely on a pension in retirement can be a bad move. Although most pensions have an automatic cost-of-living adjustment, these increases may or may not keep up with the rate of inflation by the time you retire. If you have a lot of expenses in retirement, you may need more than your pension to live on.
How to fix: Think about additional sources of income that can supplement your pension payments. Consider investing in real estate or a business, or even taking on part-time work in retirement.
6) Underestimating or overestimating life expectancy
Making either of these faux pas can have a major impact on your life, legacy and finances. If you live too long and your health declines, you could run out of money before your life ends due to medical expenses. The blessing of long life could be marred by not having enough money and a reduced quality of life.
Supposing you don’t live too long after retirement, you could run the risk of not having your affairs in order. This can have many implications, from not being able to enjoy the money you saved for the occasion of retirement to depending on the courts to distribute your wealth (after death) contrary to your desires.
How to fix: Image the real possibility of both scenarios, then plan accordingly. Consult with a CPA and estate planner to ensure your finances are handled properly in the case of either eventuality.
7) Getting scammed out of your money
Even intelligent people have fallen for scams that wipe out their wealth in the blink of an eye. Scammers prey on the elderly and have gotten away with heinous financial crimes, leaving retirees with little-to-no money for their retirement years.
How to fix: Share your financial details and decisions with a trusted relative or companion who can keep tabs on your activity when you aren’t able to. Be accountable to them and share important financial decisions so you can determine, together, if certain opportunities are legitimate and beneficial for your financial goals.
More From GOBankingRates
