28 Retirement Pitfalls - and How to Avoid Them
Retirement planning can be incredibly tricky for two reasons: First, there are a wide and varying number of factors that affect your retirement planning, and second, no two people's retirement needs are the exact same. There is no one-size-fits-all approach to realizing the visions of your golden years, and even financial advisers and experts differ in their advice -- so how should you approach this financial hurdle?
The right retirement plan is all about timing and opportunity. In nearly every way you could make a mistake -- for example, saving too late -- you can also make up ground by availing yourself of all resources at your disposal (say, your employer's 401(k) matching program). With that in mind, we've compiled a list of 28 major retirement pitfalls to avoid -- and what to do if you end up taking some missteps.
1. Having No Retirement Plan
Starting with the basics here: Not beginning the retirement-planning process is one of the first and biggest mistakes you can make. Consider what you want your future to look like and how much money you can reliably set aside now; then find a deposit product that will get you there. Employers often offer 401(k) plans and pensions (though, for the latter, less so now). You can also open an individual retirement account without an employer sponsoring the account. These products, which can offer greater returns and more diversification in investment than a traditional deposit account, are a great way to start your retirement savings.
2. Not Taking Your Employer's Match
If your employer offers to match your 401(k) contributions to a certain percentage and you don't opt in, you're essentially leaving free money on the table. Make sure to contribute at least the amount your employer matches to your retirement accounts each month -- the bonus is the incentive you'll have to save more.
3. Incorrect Beneficiary Designations
In the event of your passing, you likely don't want to leave a financial mess for your family by having your retirement plan beneficiaries and will in conflict. Make sure these designations match your intentions so dividing up your remaining assets will be as simple as possible.
4. High Retirement Account Fees
According to the Center for American Progress, the average worker will lose $70,000 from his 401(k) to fees. The promise of high yields might be tantalizing, but compare these account fees to ones attached to lower-yield options to determine the true value of your investment.
5. Not Checking Your Account's Performance
Sitting on your laurels doesn't bode well for a strong retirement. Do you know how well your investments performed last year? Or over the last five years? Unless retirement is imminent, long-term performance should dictate which funds you invest in. Don't let years pass you by on low-return investments if other safe options yield better rates.
6. Relying on Social Security or a Pension
It's no secret that the future of the Social Security system is in question. With the baby boomer generation cashing out, no one knows for certain whether the system will still exist by the time millennials retire -- and if it does, what it will look like. Companies are freezing pensions en masse; 40 percent of Fortune 1000 companies already have, according to a Towers Watson study.
7. Cashing Out Your 401(k)s Between Jobs
According to PBS' "Frontline," 70 percent of workers in their 20s cash out their 401(k)s instead of rolling them over, while 55 percent of those in their 30s do that. That means you're paying taxes and a 10 percent penalty repeatedly on your savings if you're under 55.
8. Believing You Will Want to Keep Working
You might love your career and not be able to imagine life without a 9-to-5 gig. However, your ability to keep pace in the workplace will likely wane eventually. Circumstances change, your health might not keep up with you, and you'll likely be ready to eventually take it easy and retire. Don't skimp on your saving because you think you can work until you're 90 and earn more than you do today.
9. Not Capitalizing on Your Tax Deferral
There are a number of tax advantages that apply when you're saving for retirement. These are meant to be an incentive for saving, so take advantage of them by properly reducing your taxable income and letting these funds grow tax-deferred.
10. Transfer on Death and Payable on Death Designation Mistakes
A factor if you have a trust or estate plan, Fidelity recommends double-checking your "transfer on death" and "payable on death" designations to ensure they match your will, as these designations will affect who gets your retirement account assets when you pass away. "Transfer on death" registration overrides your will, according to Fidelity.
11. Cashing Out Your Pension
Your financial adviser might try to convince you to cash out your pension from a former employer. Unless you really need the money now, this is mostly in the interest of your adviser, who could make tens of thousands in the form of commission, according to Time. Consider the incalculable benefit of a stable check you can depend on before liquidating your pension and assuming you can perfectly plan it out to last.
12. Buying Too Much Company Stock
It's unlikely that your employer is the next Enron -- but you can't rule out that possibility. Don't own more than 10 percent of your investments in company stock.
13. Burning Through Your Savings
If you saved a lot for retirement, it might feel like the ultimate payoff to finally stop working and gain access to your funds. However, don't let all that cash fool you into living the high life early on in retirement. Sure, the first years of retirement might be the best time to travel, do home projects and generally spend money on things you might no longer enjoy later on; however, moderation is key, as you have no idea how long you'll need those funds to last you.
14. Incorrect Trusts
If your hope is to still have some money left over for your children or beneficiaries to inherit, then you'll want to pay attention to your trusts. Every situation varies, but designating a trust as the beneficiary of a retirement account could be entirely useless if not drafted appropriately.
15. Retiring Too Early
Your retirement payouts are dictated by your age -- if you retire early or retire late. Depending on your designated full retirement age, you could be receiving less benefits (or more, if you wait) each year.
16. Investing Too Conservatively
The Great Recession might have scared you from riskier investments, but if you're decades from retirement, don't be too conservative with your funds -- especially if your options could give you high returns over a long period of time.
17. Investing Too Aggressively
Again, the theme here is moderation. You don't want to miss out on the best returns you can get, but you also don't want to open yourself up to too much risk, especially in the years leading up to retirement.
18. Borrowing From Your 401(k)
This isn't always a terrible idea, especially if your other loan options come at a higher price; however, in general you're going to want to avoid borrowing from your 401(k). It will likely set you back far longer than the amount of time it took you to save those funds in the first place, thanks to compounding interest.
19. Putting Your Money in Variable Annuities
In comparison to other mutual fund options, variable annuities can cost 50 to 100 percent more in fees and surrender charges, according to FinancialMentor.com. Furthermore, the gains on these accounts are taxed as normal income -- not capital gains -- upon withdrawal.
20. Starting Your Retirement Savings Too Late
Time is of the essence when it comes to retirement planning. Start even a decade later, and you'll have to dramatically adjust your monthly contributions to start making up for lost time. Do yourself a favor and save less each paycheck for longer to head for a sizable retirement.
21. Saving Too Much Too Early
If you're in your 20s and you're putting north of 10 percent of your income toward retirement, you might want to slow down. Sure, you're setting yourself up for a comfortable retirement if you start saving aggressively at a young age, but you also don't want to be behind on your savings for more imminent investments, like a home. Make sure you're saving an appropriate amount to still reach other goals with minimal debt.
22. Avoiding Stocks
Franklin Templeton found in a 2013 survey that 37 percent of long-term investors think they can avoid stocks altogether. However, you likely won't see your retirement grow to where you'd like it to be by relying on bonds, certificates of deposit and traditional deposit accounts -- especially at today's rates.
23. Not Planning for Medical Expenses
The mind often outlives the body, and medical care doesn't come cheap. With higher insurance costs the older we get, it's important to factor in medical expenses when budgeting for retirement. Opening a health savings account can help ensure you are socking away a designated amount of money toward these costs.
24. Not Calculating How Long Your Retirement Will Be
There's no way to know how long you'll live, but it's always better to err on the side of overplanning. The alternative is you'll outlive your retirement funds.
25. Unrealistic Expectations for Retirement
Consider the true costs of planning for retirement and be honest: What kind of lifestyle do you want? Draft a budget that's realistic and face the present reality of what you'll have to sacrifice to get there.
26. Paying Off Debt Before Saving
When faced with the prospect of saving for the future or paying down debt, many struggle with deciding which takes precedence. However, because time is so crucial when saving for retirement - even if it's a few decade off - it's best to devise a strategy that allows you to pay down debt while still making some headway, however minor, toward retirement.
27. Prioritizing Your Child's Education
It's no doubt generous to save for a child's education; however, you should consider the costs and benefits of you versus your child saddling that burden, especially if you're behind on your retirement savings. There are a number of options your child can take advantage of to pay for part or all of college - and these options should be on the table. Ultimately, if you're short on retirement savings, you'll likely have fewer chances than your child will to cover expenses.
28. Carrying Debt With You
By its nature, retirement means transitioning to a fixed-income lifestyle. Carrying debt into retirement will be detrimental to your financial strength and eat away at your savings. Do your best to get all debt paid off before you stop working.