28
retirement mistakes
By
Christina Lavingia
Retirement
planning can be incredibly tricky for two reasons: First, numerous factors that
affect your retirement planning, and second, no two retirement needs are the
exact same. There is no one-size-fits-all approach to realizing the visions of
your golden years, and even financial advisors and experts differ in their
advice. So how should you approach this financial hurdle?
The right retirement
plan is all about timing and opportunity. In nearly every way you could make a
mistake — for example, starting to save too late — you can also make up ground
by availing yourself of all resources at your disposal (say, your employer's
401(k) matching program).
With that in mind,
we've compiled a list of 28 major retirement pitfalls to avoid — and what to do
if you end up taking some missteps.
HAVING NO RETIREMENT PLAN
Starting with the
basics here: Not beginning the retirement-planning process is one of the first
and biggest mistakes you can make. Consider what you want your future to look
like and how much money you can reliably set aside now. Then find a deposit
product that will get you there. Employers often offer 401(k) plans and
pensions (though fewer offer pensions these days). You can also open an IRA
without an employer sponsoring the account. These products, which can offer
greater returns and more diversification in investment than a traditional
deposit account, are a great way to start your retirement savings.
NOT TAKING YOUR EMPLOYER'S MATCH
If your employer offers
to match your 401(k) contributions to a certain percentage and you don't opt
in, you're essentially leaving free money on the table. Make sure to contribute
at least the amount your employer matches to your retirement accounts each
month — the bonus is the incentive you'll have to save more.
INCORRECT BENEFICIARY DESIGNATIONS
In the event of your
passing, you likely don't want to leave a financial mess for your family by
having your retirement plan beneficiaries and your will in conflict. Make sure
these designations match your intentions so dividing up your remaining assets
will be as simple as possible.
HIGH RETIREMENT ACCOUNT FEES
According to the Center
for American Progress, the average worker will lose $70,000 from his 401(k) to
fees. The promise of high yields might be tantalizing, but compare these
account fees to ones attached to lower-yield options to determine the true
value of your investment.
NOT CHECKING YOUR ACCOUNT'S PERFORMANCE
Sitting on your laurels
does not bode well for a strong retirement. Do you know how well your
investments performed last year? Or over the last five years? Unless retirement
is imminent, long-term performance should dictate which funds you invest in.
Don't let years pass you by on low-return investments if other safe options
yield better rates.
RELYING ON SOCIAL SECURITY OR A PENSION
It's no secret that the
future of the Social Security system is in question. With the baby boomer
generation cashing out, no one knows for certain whether the system will still
exist by the time millennials retire — and if it does, what it will look like.
What's more, companies are now freezing pensions en masse; 40 percent of
Fortune 1000 companies already have, according to a Towers Watson study.
CASHING OUT YOUR 401(K)S BETWEEN JOBS
According to PBS
Frontline, 70 percent of workers in their 20s cash out their 401(k)s instead of
rolling them over, while 55 percent of those in their 30s do that. That means
you're paying taxes and a 10 percent penalty repeatedly on your savings if
you're under 55.
BELIEVING YOU WILL WANT TO KEEP WORKING
You might love your
career and not be able to imagine life without a 9-to-5 gig. However, your
ability to keep pace in the workplace will likely wane eventually.
Circumstances change, your health might not keep up with you, and you'll likely
be ready to eventually take it easy and retire. Don't skimp on your saving
because you think you can work until you're 90 and earn more than you do today.
NOT CAPITALIZING ON YOUR TAX DEFERRAL
There are a number of
tax advantages that apply when you're saving for retirement. These are meant to
be an incentive for saving, so take advantage of them by properly reducing your
taxable income and letting these funds grow tax-deferred.
TRANSFER ON DEATH AND PAYABLE ON DEATH DESIGNATION MISTAKES
A factor if you have a
trust or estate plan, Fidelity recommends double-checking your "transfer
on death" and "payable on death" designations to ensure they
match your will, as these designations will affect who gets your retirement
account assets when you pass away. "Transfer on death" registration
overrides your will, according to Fidelity.
CASHING OUT YOUR PENSION
Your financial advisor
might try to convince you to cash out your pension from a former employer.
Unless you really need the money now, this is mostly in the interest of your advisor,
who could make tens of thousands in the form of commission, according to Time
Magazine. Consider the incalculable benefit of a stable check you can depend on
before liquidating your pension and assuming you can perfectly plan it out to
last.
BUYING TOO MUCH COMPANY STOCK
It's unlikely that your
employer is the next Enron — but you can't rule out that possibility. Don't own
more than 10 percent of your investments in company stock.
BURNING THROUGH YOUR SAVINGS
If you saved a lot for
retirement, it might feel like the ultimate payoff to finally stop working and
gain access to your funds. However, don't let all that cash fool you into
living the high life early on in retirement. Sure, the first years of
retirement might be the best time to travel, do home projects and generally
spend money on things you might no longer enjoy later on; however, moderation
is key, as you have no idea how long you'll need those funds to last you.
INCORRECT TRUSTS
If your hope is to
still have some money left over for your children or beneficiaries to inherit,
then you'll want to pay attention to your trusts. Every situation varies, but
designating a trust as the beneficiary of a retirement account could be
entirely useless if not drafted appropriately.
RETIRING TOO EARLY
Your retirement payouts
are dictated by your age — if you retire early or retire late. Depending on
your designated full retirement age, you could be receiving less benefits (or
more, if you wait) each year.
INVESTING TOO CONSERVATIVELY
The Great Recession might
have scared you from riskier investments, but if you're decades from
retirement, don't be too conservative with your funds, especially if your
options could give you high returns over a long period of time.
INVESTING TOO AGGRESSIVELY
Again, the theme here
is moderation. You don't want to miss out on the best returns you can get, but
you also don't want to open yourself up to too much risk, especially in the
years leading up to retirement.
BORROWING FROM YOUR 401(K)
This isn't always a
terrible idea, especially if your other loan options come at a higher price;
however, in general you're going to want to avoid borrowing from your 401(k).
It will likely set you back far longer than the amount of time it took you to
save those funds in the first place, thanks to compounding interest.
PUTTING YOUR MONEY IN VARIABLE ANNUITIES
In comparison to other
mutual fund options, variable annuities can cost 50 to 100 percent more in fees
and surrender charges, according to FinancialMentor.com. Furthermore, the gains
on these accounts are taxed as normal income — not capital gains — upon
withdrawal.
STARTING YOUR RETIREMENT SAVINGS TOO LATE
Time is of the essence
when it comes to retirement planning. Start even a decade later, and you'll
have to dramatically adjust your monthly contributions to start making up for
lost time. Do yourself a favor and save less each paycheck for longer to head
for a sizable retirement.
SAVING TOO MUCH TOO EARLY
If you're in your 20s
and you're putting north of 10 percent of your income toward retirement, you
might want to slow down. Sure, you're setting yourself up for a comfortable
retirement if you start saving aggressively at a young age, but you also don't want
to be behind on your savings for more imminent investments, like a home. Make
sure you're saving an appropriate amount to still reach other goals with
minimal debt.
AVOIDING STOCKS
Franklin Templeton
found in a 2013 survey that 37 percent of long-term investors think they can
avoid stocks altogether. However, you likely won't see your retirement grow to
where you'd like it to be by relying on bonds, certificates of deposit and
traditional deposit accounts — especially at today's rates.
NOT PLANNING FOR MEDICAL EXPENSES
The mind often outlives
the body, and medical care doesn't come cheap. With higher insurance costs the
older we get, it's important to factor in medical expenses when budgeting for
retirement. Opening a health savings account can help ensure you are socking
away a designated amount of money toward these costs.
NOT CALCULATING HOW LONG YOUR RETIREMENT WILL BE
There's no way to know
how long you'll live, but it's always better to err on the side of
overplanning. The alternative is you'll outlive your retirement funds.
UNREALISTIC EXPECTATIONS FOR RETIREMENT
Consider the true costs
of planning for retirement and be honest: What kind of lifestyle do you want?
Draft a budget that's realistic and face the present reality of what you'll
have to sacrifice to get there.
PAYING OFF DEBT BEFORE SAVING
When faced with the
prospect of saving for the future or paying down debt, many struggle with
deciding which takes precedence. However, because time is so crucial when
saving for retirement — even if it's a few decade off — it's best to devise a
strategy that allows you to pay down debt while still making some headway,
however minor, toward retirement.
PRIORITIZING YOUR CHILD'S EDUCATION
It's no doubt generous
to save for a child's education; however, you should consider the costs and
benefits of you versus your child saddling that burden, especially if you're
behind on your retirement savings. There are a number of options your child can
take advantage of to pay for part or all of college — and these options should
be on the table. Ultimately, if you're short on retirement savings, you'll
likely have fewer chances than your child will to cover expenses.
CARRYING DEBT WITH YOU
By its nature,
retirement means transitioning to a fixed-income lifestyle. Carrying debt into
retirement will be detrimental to your financial strength and eat away at your
savings. Do your best to get all debt paid off before you stop working.
ABOUT THE WRITER
Christina Lavingia writes for GOBankingRates.com (), a leading portal for personal finance news and features, offering visitors the latest information on everything from interest rates to strategies on saving money, managing a budget and getting out of debt.
Christina Lavingia writes for GOBankingRates.com (), a leading portal for personal finance news and features, offering visitors the latest information on everything from interest rates to strategies on saving money, managing a budget and getting out of debt.
