The idea of retirement is changing and there is more to retirement planning than saving money. This page will help you understand the various sources of income you will have during retirement and other issues you need to consider as you enter this phase of your life.
Six Retirement Planning Mistekes
We all make mistakes, but learning from our mistakes and identifying what mistakes to avoid can make a big difference. Here are six common mistakes people make with retirement planning that you should avoid.
- Not maximizing your match. If you work for an employer who offers a 401k or other retirement plan with a match program, take advantage of it. This is free money, and the best return on your dollar that you'll likely find. By not maximizing your employer's match is leaving money on the table.
- Taking a loan. Too many people treat their retirement plan as a savings account if the plan allows for loans to be taken out. Borrowing money from your retirement savings can be a costly mistake. The money you take out doesn't have the chance to grow and compound like the rest of the money. While you may pay yourself back the interest, it generally doesn't make up for the time lost. Also, if you leave your job before repaying the loan, it may count as a distribution if not paid off in full. This means paying taxes and possibly a stiff early withdrawal penalty.
- Not diversifying your investments. Don't put all of your eggs into one basket. Sound advice, yet people often don't follow it. It is easy to get caught up in your investments when the market is doing well, and chasing those big returns may seem like a good idea. Without proper diversification you are subjecting yourself to higher risk with only a potential for better returns. A properly diversified portfolio will help you minimize your risk while maximizing your return.
- Not rebalancing. While diversifying is important, it doesn't do much good if you don't regularly rebalance your portfolio. Over time, your portfolio of 50% stocks and 50% bonds probably won't be the same as when you started. If stocks experience a period of significant growth, the stock portion of your portfolio will grow while your bond holdings may only grow slightly. This disparity could turn your portfolio into a 70% mix of stocks and 30% bonds. This portfolio is now significantly more risky than your initial 50% mix.
- Cashing out. Many people decide to cash out their employer retirement plan when they leave the company, which is a bit mistake. This distribution becomes fully taxable and possibly subject to an additional early withdrawal penalty. For some people this means nearly cutting the account value in half! When you leave an employer, you should consider rolling the money over into your new employer's plan or an IRA. This eliminates any current taxes or penalties that would otherwise apply.
- Paralyzed by choices. “How much money do I need to save?” “How much money do I need to have in retirement?” “What investments are right for me?” Retirement planning is full of important choices to make, so don't be forced into inaction by them. Take things one step at a time, and don't let the sheer number of choices stop you from moving forward. Time is a valuable asset; don't let it go to waste.