Friday, September 17, 2010

Six Retirement Mistakes to Avoid
By: Cindy Perman Writer

You know you need to save for retirement and to max out your company matching.

But beyond that, do you really know what you’re doing? It’s quite possible you’re still making mistakes with your retirement savings.

If you’re not scared, you should be: With most retirement mistakes, you’re losing money that you’ll never get back. And, it’s a lot of money. Imagine if your employer screwed up your paycheck. You wouldn’t tolerate that at all. And you certainly shouldn’t tolerate it from yourself — your retirement is your paycheck after you retire.

“Saving for retirement needs to be a higher priority,” said Greg McBride, a senior financial analyst at “There is a widespread, cavalier attitude toward retirement savings because our parents got along just fine with very little retirement savings, thanks to pensions and government benefits. But today’s workforce has no assurance of either once they retire.”

So, we checked in with a few financial analysts and here are Six Retirement Mistakes You Should Avoid.

1. Not utilizing tax-savings options.

Admittedly, this doesn’t sound sexy, but pay attention: Never pay any tax on your retirement savings before it’s time. In 401(k)s, Simple Employee Pension plans, Individual Retirement Accounts and Keogh plans for the self-employed, you are only taxed when you withdraw money. So don’t withdraw it until you’re ready to retire, or you will not only lose that money to taxes — but also the compound interest that money would make in your account. In the case of Roth IRAs and Roth 401(k)s, there are never any taxes — even in retirement.

2. Not utilizing catch-up provisions for those 50 and older.
When you turn 50, the annual contribution limit goes up for both IRAs and 401(k)s. With the IRA, you can add an additional $1,000 per year for a total of $6,000. And with the 401(k), you can add an additional $5,500 for a total of $22,000.

Even if you're on track to meet all of your retirement goals, this is tax-free money that can start working for you now. And, like mistake No. 1 — if you miss the opportunity now, you'll never get the chance to make up that money later. So tuck a little more away now — and you'll rest easier in retirement.

3. Withdrawing or borrowing from your retirement plan — FOR ANY REASON.

But I need it to buy a house! But I need it to send my kid to college! I promise I’ll pay it back!

Whatever reason you can come up with for why you need to borrow money from your 401(k), it’s never a good idea. Let’s repeat that so we’re clear: It’s NEVER a good idea.

The reason why is simple: You’ll never get that money back — even if you repay it.

“No one would argue with the merits of sending your kid to college. Or the notable benefits to homeownership,” McBride said. “But you won’t get a higher contribution limit next year because you took money out this year — You will always have that amount less. There’s no way to close the gap.”

“If you have to raid the retirement account to buy a house — don’t buy a house,” McBride said. “Your kid can borrow money to go to school — but you can’t borrow money to retire.”

4. Underestimating how long you’re going to live.

So your parents lived until they were 80 or 90 but you’re convinced you’re going to 70 tops.

Say, where’d you get that crystal ball?

The official retirement age was set at 65 because the average life expectancy used to be 62. But guess what? Now it’s in the mid-80s.

“When we plan out retirement for our clients, we assume life expectancy of 90 for men and 95 for women,” said Stacy Francis, a personal financial adviser and founder of Savvy Ladies, a group aimed at educating women about money.

“Our clients just look at us and roll their eyes,” Francis said. “They say — if I’m still around at 88 there’s just no way!”

Well, unless you have a time machine and know for sure — you should follow Francis’s lead and plan for living into your 90s — or even to 100. If not, you can be pleasantly surprised … with all the money you have left over.

5. Overestimating your returns.

So, you took quite a hit in your retirement savings during the past two years. You feel humbled. You feel like you’ve learned a lot.

But have you?

If you’re assuming that you’ll get back to an average of 8 percent to 10 percent returns by the time you retire, then the answer to that question is “No.”

“We call this the ‘New Economy’ because the returns we expect on our portfolio are closer to 6 percent — maybe even 7 percent,” Francis said. “A lot of people have really used the market as a backup to get them where they want to go … We’re telling people, ‘Guess what? There’s a new normal.’”

Francis advises people to take a long, hard look at their lifestyle, and consider a different standard of living for retirement. If you have two homes, maybe downsize to one. Spend less. Really, how much more stuff do you need?

6. Failing to make a retirement budget.

In these working years, you probably know what your annual salary is, what your net take-home pay is — and what your expenses are.

But do you know those numbers for your retirement?

How exactly do you expect to live?

It’s not enough to just dump money into an account. You need to know how much is there, how much it’s projected it will grow — and if it’s going to meet your income needs.

“The assumptions that people have about retirement are generally insane,” said Jerry Lynch, a financial adviser and owner of JFL Consulting in Fairfield, NJ. “They don’t realize the potential cost of medical care and they assume rates of return which just aren’t realistic,” he said.

Lynch says a safe withdrawal for your retirement income is 4 to 4.5 percent. That means, if you have a million dollars when you retire, you should be drawing no more than $40,000 to $45,000 a year.

If you don’t set up a budget now — and make sure your savings plan is set up to meet that goal, you could be in for a big surprise.

“The quality of your retirement is going to die if you think you’re going to run out of money,” Lynch said.
Ask yourself this: If you run out of money, how easy would it be to get a job at 85?

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