Thursday, December 18, 2014 - 30°F
Common Pitfalls That Can Sabotage Your Retirement
1. Putting Off Saving for Retirement Until a Future Date
"The future is not going to be bright, unless people start to save more money." Henry Hebeler
Many people are not saving vigorously for retirement, making excuses that they cannot save because of high food, fuel, or day-care costs. But saving hard and saving long are important components of retirement success even if it means going without second lattes several times each week. Don't fall into the trap of believing you have "all the time in the world" to save for retirement! And don't put off your savings efforts until a later date. Take steps to intensify your savings efforts now.
2. Opting Not to Participate in your Employer's 401(k), 403(b) or 457(b) Plan
"A Boomer who is watching this show and wants to change his life should double their 401(k) plan the moment this show is over." David Bach
Many working Americans simply do not participate in their employer's tax-deferred savings plans even if their employers pay "matching" funds. If they do participate, the vast majority of employed Americans today contribute less than the maximum possible amount. This sabotages an excellent savings (and often "matching") opportunity. If your employer has a tax-deferred savings plan, always invest in it to the max! And always take advantage of any free "matching" funds your employer may offer. That's free money!
3. Concentrating Your Savings in Only a Few Investments
"The most devastating thing to someone is if there is a major movement down in the equity market in the year or two before they retire or even the year or two after they retire. If you're fully retired and you lose 20 to 30% of that nest egg because of a big market adjustment, you're not going to have time to catch up again. So diversification and diversifying out of equities before you retire is something people really need to focus on." Dallas Salisbury
As you save, it is important to broadly diversify the deployment of your money. Concentrating your savings in just one stock or in just a limited number of investments puts your capital at risk. A single investment can go sour and cause you serious harm. To reduce the risk of losses, be sure to broadly diversify your money across a variety of different kinds of investments cash, stock, bonds, real estate (other than your primary residence), and so on. Make sure that no single investment represents more than 10% of your total wealth. And be sure to diversify the geography of your investments as well by allocating some of your money non-U.S. stock and bond funds.
4. Chasing Windfall Returns
"It's not how much you have, it's how much you KEEP." Ed Slott
Many people invest their money in the funds or investment categories that pay the highest returns. They chase windfall results. That is usually not a prudent way of investing. It often means that you are "buying high" and putting your investment money at risk of suffering a correction. Instead, look for a diversified array of investments and be leery of investments that are "red hot." They may lose their luster, correct, and cause you losses.
5. Drawing Down your Savings Prematurely
"When you cash out your 401 (k) plan, you pay taxes and you pay penalties. It's a financial disaster…" David Bach
Most withdrawals from an IRA or 401(k) or similar savings plan before the age of 59½ trigger a 10% penalty. Yet many people draw down their savings early and pay this charge. Many change jobs and draw down their 401(k) savings, too. Whether or not you incur a tax penalty, drawing down your retirement savings to buy a new car or the latest flat-screen TV or new clothes can derail your savings and hurt your compounding momentum. Avoid premature draw-downs of your savings at all costs! Whether you change jobs or stay put, do not deplete your savings prematurely.
6. Leaving Your Savings in IRA Accounts Too Long
"The rule says, starting on April 1st of the year following the year you turn 70 1/2, we are going to put you on a schedule and we want that money. You are forced to take that money out and if you don't we are going to hit you with one of the worst, severe penalties in the tax code." Ed Slott
You can also incur tax penalties if you fail to draw down money from your IRA account before the age of 70½. There are penalties for both the premature withdrawal as well as late withdrawal from such accounts. Read Ed Slott's books for advice about the correct timing of your withdrawals, so you can avoid penalties and avoid losing retirement money.
7. Going It Alone
"Choose a highly rated and reputable company to do business with. Make sure you understand what you are buying, what details of the contract are, and if you don't understand, don't buy it!" Ken Little
More and more, preparing for retirement is each individual's personal responsibility, and it's getting increasingly complex. There are thousands of investment funds to consider. There are hundreds of tax norms to master. And there are constantly changing economic developments to understand and react to. That's why having a professional financial specialist to guide you may be your most important retirement investment of all. If you cannot afford a professional planner, ask your library for the books we cite here and use the free resources and research cited here as well.
8. Becoming Defeatist
"The absolutely first thing that you have to do is begin a savings plan. You never get anywhere if you don't have that savings habit. 'Pay yourself first' is the old cliché, but it is important and it is correct." Ken Little
For many, saving energetically and investing skillfully are daunting tasks. Many feel dejected or outright defeated when they think about retirement. Don't become paralyzed! You can step up savings and amass capital for yourself whatever your savings to date, whatever your age, and whatever your income level. Use the advice of our experts and the tools listed in this site to help you. Make a resolution to start saving for retirement or improve your savings for retirement today.