We live in tumultuous economic times. The future of social security is uncertain. Your financial security in retirement is in your hands. Most people are aware of the need to have a retirement plan, but many simply do not know how to achieve their financial goals. The best thing you can do to ensure a financially secure retirement is consult a qualified professional financial planner and avoid making these five retirement planning mistakes:
Starting a Retirement Savings Program Too Late and Not Investing Regularly:
It is never too early to begin thinking about retirement.
Starting a retirement savings program when you are young allows you to harness the power of compound interest, and makes your money work for you. Here is the difference between starting your retirement savings program at age 23 and age 43:
A person who begins investing $110 per month at age 23 and earns a 7% annual return will accumulate nearly $337,000 by the time he retires at age 65.
A person who begins investing $110 per month at age 43 and earns a 7% annual return will accumulate $69,000. By the time he retires at age 65.
In order to accumulate $337,000 by age 65, the person who begins saving at age 43, must invest $540 per month at a 7% annual return.
The key to successful retirement planning is to start early and invest in your retirement program consistently.
Failure to Contribute to Tax-Free or Tax Deferred Retirement Plans
Tax-deferred retirement planning is one of the best ways to accumulate money for the future. An employer sponsored 401K program deducts pre-tax income from your paycheck and allows the savings and investment income tax-free until you begin taking distributions upon retirement.
There are major advantages to these type programs: You are not paying income tax on the money deducted from your check nor is the growth of the investment taxed until you retire, when your tax rate will presumably be lower.
Further, some companies (though fewer than in the past) offer matching or partial matching contributions to your own contributions. This is free money folks…don’t pass it up.
Other tax free/tax deferred retirement plans include Roth IRA, Traditional IRA, and Simple IRA. Research which type of program suits your needs and contribute the maximum amount you can.
Cashing Out or Taking Loans from Retirement Funds Before Retirement
Many people are financially stressed these days. It is tempting to look at the thousands you have salted away in your 401K or other retirement savings program and think about cashing in to help your current situation. Resist the urge. You will pay a heavy penalty to the IRS for early distribution of tax-free or tax-deferred retirement funds.
Some 401K programs allow you to take a loan from your retirement funds, with a structured program to pay the fund pack. Resist this temptation as well. You will end up paying interest to the 401k plan administrator for borrowing your own money from yourself.
Failure to Review Your Retirement Plan
There is no need to follow the progress of your retirement investments on a daily or weekly basis. This will drive you crazy and may lead to chasing trends, which ultimately leads to poor investing. Constant shifting of your investment funds also will result in paying more fees which hurts your bottom line. Retirement planning is a long-term proposition.
However, you should review your retirement portfolio with your financial planner on a six-month or annual basis, or whenever you have a major lifestyle change. As time passes, your investment goals will change and your acceptable level of risk will need to be addressed. Riskier investments that were fine when you were twenty-five may not be so attractive when you are fifty-five.
Adjust your retirement plan portfolio to meet the changing circumstances of your lifestyle. Just don’t do it too often.
Failure to Diversify
Diversify. Diversify. Diversify. This may be the most common mantra of the retirement planner. Having your funds in three separate mid-cap mutual funds is not diversification. Spread you money around several sectors. Invest in international funds as well as domestic funds. Assign a percentage of your money to equity stocks and a percentage to bonds, etc.
It is the old do not put all your eggs in one basket principle. No matter how pretty that basket may look at the time.
Avoiding these five common retirement planning mistakes will not guarantee a comfortable retirement, but it will make the road there much smoother.