The road to retirement is long and winding. It’s filled with speed bumps, potholes and dead ends. Some of the obstacles we face are largely out of our control. A natural disaster, job layoff, or debilitating illness can lead to financial ruin and there is little you can do to predict or avoid them.
But there are many other potholes you can avoid with careful retirement planning and wise decision making. If you can avoid the seven pitfalls below you will be in better shape than most.
1. Not calculating how much money you will need in retirement. Hopefully you are already setting money aside for your golden years, but are you sure it will be enough? Most people seriously underestimate how long their retirement will last and how much cash they will need to support themselves. They run the risk of using up their savings too soon.
Since each of us will have different needs and circumstances come retirement, I can’t give you a magic number that you need to save each month. But there are dozens of online calculators that you can use to determine your optimal savings rate.
2. Not starting early. When we’re young and just starting out, retirement seems like it’s centuries away. We tell ourselves that we’ll have plenty of time to build our savings later, and that we need to worry about the mortgage and the kids for now. But before you know it a few years slip by and retirement is a lot closer than you realized.
Is it too late to start saving? No. It’s never too late. But you may have already missed out on years of savings and compound interest. Start early. Start today.
3. Not taking advantage of all the tools at your disposal. While saving for retirement can seem like a daunting task, you do not have to go it alone. There are tools that will help you grow your savings quickly.
Does your employer offer a 401(k) plan? Contributing to a 401(k) not only adds to your savings of tomorrow, it lowers your tax bill today. That’s a double winner.
Plus, if your employer offers matching contributions your savings will grow even faster. Say you’re earning $35,000 a year and you contribute 10 percent of your salary ($3,500) to a 401(k) plan. A typical employer match would be around 50 percent on the first 6 percent of your compensation. In this case that would amount would be $1,050. The result is that by contributing $3,500 of your own money, you have received a total of $4,550 toward your retirement. That’s just too good of a deal to pass up.
If you are not eligible for a 401(k) plan, you can contribute to an Individual Retirement Account (IRA) instead. IRA contribution limits are less than those of a 401k and you won’t receive any matching contributions, but your account will grow on a tax-deferred basis until you retire.
4. Cashing out early. The days of spending one’s entire working career with the same company are over. In today’s world, it is common to jump from one job to another. But far too many workers cash out their 401(k) plans when they switch jobs. Not only do they wipe out the retirement savings they had built up, but they have to pay income taxes on it too. Plus, if they are under the age of 59 1/2 they will pay an additional 10 percent penalty tax.
It just doesn’t make sense to save up your money for retirement and then cash it out early. Depending on your plan’s provisions you may be able to leave your 401(k) with them even after you go, but this is usually not your best option. Instead, roll your balance into your new employer’s 401(k) or into an IRA. You won’t have to pay any taxes if you elect a rollover, and your retirement nest egg will remain intact.
5. Taking bad advice. Not everyone has the time, desire, or expertise to plan out their retirement for themselves. There’s no shame in admitting you have limitations and letting a financial adviser help you.
But choosing the wrong financial adviser can be tricky, and if you make a poor choice it’s you that will be sorry. Don’t just pick a name out of the yellow pages. Ask your friends and family for recommendations. Then interview them carefully. Make sure they have experience and a winning track record. Discuss your goals and ask about their investing strategy. Are they too conservative or too risky for your taste?
How do they get paid? Do they receive a commission on all trades or an hourly fee? Do they have relationships with financial companies that could cause a conflict of interest? These are all important things to know.
6. Paying too many fees. There are always costs involved in investing. Execution fees, asset-based fees, expense ratios, and fees paid to a financial planner or broker are just a few of the expenses that will drag down your savings.
You can never avoid fees altogether, but you can minimize them. Look for investments with low expenses. Index funds generally charge much less than mutual funds that make a lot of trades.
Shop around and minimize expenses. Keep in mind that the more you pay in fees, the less you will have at retirement.
7. Retiring early. When we’re working, retirement seems like the Holy Grail. We can’t wait to kick off our shoes and enjoy doing whatever we want. But after awhile some retirees get bored. By then, it’s too late to return to the workforce.
Before you decide to retire for good, make sure you are ready. Sit down with your employer and ask if you can scale back your responsibilities and hours to give yourself more free time without retiring. Or perhaps work on projects as a consultant instead of a full-time employee.
And remember that the longer you work and receive a salary, the longer you can go without tapping into your retirement savings.Photo: fairfaxcounty