1. Social Security May Not Be There For You
There is no guarantee that social security will be there for us. One of the main misconceptions people have is that social security is income. Social security is intended as a means of supplementing your income. If you are banking on receiving regular payments to cover your monthly bills, consider the fact that in the past three years, current social security recipients did not receive a cost of living increase. In addition, they did not receive the meager $250.00 throw-back from the government in the current year. Do not assume you will have enough to live on with receiving Social Security as your sole income. Most people underestimate how long they will live. The current retirement age is set at 62-65 because most people did not expect to live past age 70.
When retirement planners make plans today, they make calculations based upon women being age 95 and men being age 90. If you retire at age 65 and get a monthly check for $900.00 you can certainly expect the cost of living to greatly multiple four or 5 times that amount over the next 30 years.
2. Waiting Until It’s Too Late
It is never too early to start saving. For example, If you start saving right out of college near age 21at the rate of $100.00 per month. If your annual return averages 10% ( lets say you have invested in an index fund) by age 65 you will end up with close to $950,000.
If you wait later until age 35 and saved an average of $350.00 per month averaging 10% annually you could end up with nearly $600,000. It’s much easier to start saving earlier.
3. Not Knowing Your Risk
Up until four years ago, there was an old rue of taking the number 120 and subtracting from your age to determine the percent of high risk investments you should make.
For example if you are 35 years old then it would have been advised for you to place 85% of your retirement funds in stocks and 15% in money market or bonds. This advice no longer applies to today. In the current economy we can conservatively expect returns to be closer to 6-7%. After so many people have been humbled by large losses of retirement funds, they have flipped the rule and would now invest 15% in the stock market and 85% in money market or bonds. Meanwhile you closely monitor the returns each year and you can increase or decrease your portfolio percentages accordingly.
4. Changing Your Mind Too Quickly
A recent study was conducted that investigated why women were better investors than men. The reason cited was that women selected investments that they can hold and they made fewer trades or changes in their decisions. Men on the other hand made more frequent adjustments to their portfolios thus resulting in more loss than women.
5. Not Taking Advantage of Employer Matching Plans
If you company provides matching contributions to your 401K, you should take advantage of this by setting a goal on saving more.
For example if your employer matches your contributions by 50%, and you contribute $100.00 per month. You gain an extra $50.00 per month. At the age of 65 this can amount to a total of $500,000 in additional gained money from your employer, you would be retiring with over $1,400,000 . It is a good rule of thumb to save 3% of your salary to contribute towards your 401K.
6. Borrowing From Your 401K
The risk is higher than a payday loan. You are taxed twice. You are taxed at the current tax rate when you withdraw the money. For example, if you borrow $10,000, factor in paying back $14,000 to pay back the money you borrowed. You will be taxed again when you retire and use your funds. You have to pay back the funds very quickly within the time limit given or risk paying a 10% penalty.
In this current economy, most people have found it hard setting goals to commit to retirement plans due to the uncertainty of the market and the stability of their employment. Bare bones advice is, if you are hitting pay-dirt, collect your pennies in a jar and open a free bank account. Treat your savings as if you are paying a bill, make a commitment, and stick to it. If you are lucky to be employed in this economy, do the best you can to comfortably allocate 3% or slightly more if you can to your 401K. Do not wait. Time can also cost you money.