Saving for retirement gets increasingly difficult the closer you get to retirement age. It is important to know the potholes that many retired folks are encountering so you can avoid these mistakes. Here are the 5 most common mistakes in retirement savings that I have seen.
1. Waiting too long to begin retirement savings. Many people wait until they are in the 40’s or even 50’s to consider a retirement savings plan. The money that works the best for you is the money contributed in your 20’s. Many employers offer 401(k) matching programs and too many employees are passing this up. It is important to always participate in employee contributions at the maximum level to reap the maximum benefit. This is essentially free money that you pass up when not taking advantage of this benefit these matching programs.
2. Underestimating the Cost of Health care. Health care costs are on the rise in America and the importance of planning for long term health care should be at the top of financial and retirement planning lists. According to the Health Research and Education Trust the average American spends 50% of their lifetime medical expenditure after the age of 65 and many of these folks have not factored in this cost when planning for their retirement. Factoring in this cost is essential to successful retirement planning.
3. Not diversifying enough. In order to receive the maximum benefit from your retirement savings, you should diversify and as your age increases your investments should become increasingly conservative. Younger investors who are not near retirement age should place approximately 60% of their savings in high-growth stocks as well as a good mix of conservative bonds and slow growth investments since there will be time to recover if the market flutters. This is the time to take on a higher risk.
4. Ignoring your investments. If you are unaware of what is taking place with your investments or lack a portfolio strategy, you are in for a big surprise when you near retirement age. I am sure that you wouldn’t drive down the street with a blindfold over your eyes. The same attention should be paid towards your savings and investment because what you do now will affect you later.
5. Spending your retirement savings on anything other than retirement. Many people cash out on their 401(k)s when a job change occurs instead of rolling over into an IRA. You can severely inhibit your retirement savings by cashing out and you pay extremely high penalties and taxes if you choose this route. On a $6,000 investment to your 401(k), depending on where you live, you could loose on average $1,500 of that money if you cash out. Be sure to roll over your accounts in lieu of taking the money out.
Keep putting that money away if you are in your younger years. For those in the years closest to retirement age, it is important to rely on damage control and fix what you can before you retire. This may mean reducing your cost of living and planning for successful retirement.