1/10/2013 4:30 PM ET|
6 ways to ruin your retirement
Whether you're saving in a 401k, IRA or some other employer plan, it's important to avoid mistakes that could be very costly down the road.
Contributing to an employer-sponsored retirement plan is an important step toward a secure future, but experts warn that, like any other financial asset, it takes oversight as well as common sense to reap the geatest benefits.
Avoid these six critical mistakes to improve your chances of having a successful retirement.
Mistake No. 1: Opting out
One of the biggest mistakes is to decide not to participate, says Robert Gordon, senior financial adviser at Miami-based Investor Solutions.
"As the saying goes, 'you've got to be in it to win it,'" he says. "Be it a 401k, 403b, 457 or other similarly numbered options, the responsibility is on the employee to take the initiative and complete the paperwork."
In an attempt to encourage more people to take advantage of employer-sponsored retirement plans, the 2006 Pension Protection Act provides safe harbor to companies that offer automatic enrollment, requiring employees to opt out rather than in, says Artie Green, the founder and principal of Cognizant Wealth Advisors in Palo Alto, Calif.
"That has not taken hold to the degree the government was hoping," says Glenn A. Hottin, a financial planner at M&H Advisors in New Haven, Conn. "The majority who don't elect to join generally are confused by their choices, and the confused mind does nothing."
Definitely don't opt out if your company offers automatic enrollment. It will also automatically select an investment option for you -- often a target-date fund. Once you're in the plan, take time to acquaint yourself with all its investment options so you can determine if the preselected fund is the best choice or if there's one that better meets your goals, time horizon and risk tolerance.
Mistake No. 2: Borrowing from your plan
Your company retirement plan is not a piggy bank. Treating it like one has very expensive consequences.
"Borrowing from a retirement account has become more prevalent," Hottin says. "For someone out of work, it may be the only way to address some large expenses.
"My suggestion is always to exhaust other options prior to going into your 401k, because it's so expensive to do so. It could cost you as much as 40 cents on the dollar -- and that is money you never recover." That could occur if you borrow the money and then default on the loan, which results in a deemed distribution on which you would owe taxes and a penalty if you're younger than 59 1/2.
"Some things are legal but just not wise," Investor Solutions' Gordon says. "This is one of those things."
Mistake No. 3: Cashing out in a job change
"I am always amazed by the number of people who cash out their plan when they leave their previous employer," Gordon says. "I hear excuses like, 'It was easier than rolling it over,' 'I needed the money for moving expenses,' or, the best, 'I used the money to fund my vacation before I started the new job.'"
Cashing out before age 59 1/2, he says, carries a 10% penalty. "It doesn't make sense to take the funds on which you have been earning less than 2% and pay a guaranteed penalty of 10%," says Gordon.
Of course, this would be in addition to the taxes you would owe.
This also doesn't take into account the returns you forfeit by not staying invested. Even small amounts cashed out when you're young can keep you from amassing a large nest egg. For example, if you had kept $5,000 in your retirement account 20 years ago instead of cashing it out, that amount could have grown to nearly $14,590 today, assuming a 5.5% annualized return.
While the past 10 years or so have been a challenge for investors, the stock market's historical returns have rewarded them.
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I would never put my assets in the hands of some financier and then go hide my head in the sand. My father was self-employed all my life. I watched him prosper and come down, shift, re-invent and then one day-- retire. Two things I will cherish from observing him... never let go of cash flow and never go where the crowd goes just because they go there. In 2008 era MSN Money, these blogs were loaded with Retirement Planning Financiers who bragged (because they are psychopaths not geniuses). The prevailing trend was to hold 1500+ positions using your money and compensating whenever one two fell with the assets of the others. That is nothing more than spinning plates in the air on sticks. There isn't some secret knowledge to investing but there is to retiring well-- have cash flow when you do. My father didn't buy a vineyard when he retired, he just enjoyed himself on his terms. Isn't that the real goal for us all? Happy means doing what we want, not doing delusional things or listening to financiers on how to spend what we worked for.
Our nation would be way better off if we adhered to one mandate: Financier isn't a career, it's a problem.
We’re pretty much pre-world war two, the government and Banks have a license to steal When you least expected, the company or government will **** any 401s companies and, or what the government owes think I’m full of $!* right now their figuring how to get rid of S. Security with the blessing of everyone making a million a year but still making you pay into it! The credit card is the most expensive money you can own conveyance, maybe but anyone can get access to it good luck reaching 70! This blog gave me an idea for a title of a book?” How to get rich with someone else’s money “
They left out the biggest Mistake? Letting someone else invest it for you!
Thanks for the info!
While I was aware that 401ks carried protection from creditors, it was news to me about the IRAs. Apparently these do not belong to ERISA 1974, so that is why. Although from what I could tell in most circumstances even that doesn't matter unless you roll over more than a million into either a traditional or Roth IRA.
Spend as little as possilble and save everything you can. I am 62 and in my humble opinion what I do have invested is in stocks , pay a dividend every three months. I have tax free mutual funds that are paying 4.5% per year,federal and California state tax free income every month. My approach is very conservative. At this age you can not take much risk, there is not enough time to recover a big loss.I recommend reading articles read the information on companies. There is so much available these days that you can make your own decisions. Yes, reading what the analist says is good too, but draw your own conclusions after researching and looking at the strongest long lasting companies that pay a regular dividend.
I guess if you are 25 or 30 years old, you can take more risk but not at 62 years old. With these computers these days we can open saving and investment accounts very quickly and safely.
It is never too late to keep saving what you can.
ANYBODY WHO VOTED FOR OBAMA JUST RUINED THEIR LIFES AND LOST THEIR FREEDOM
AND THEIR FUTURE! HE HAS DOOMED THIS COUNTRY FOR THE NEXT 20 YEARS! YEAH TAX
THE MIDDLE CLASS MORE OBAMA! GIVE TAX BREAKS TO ALL YOUR RICH SUPPORTERS!
DON'T CUT SPENDING, PORK, WASTE, FRAUD BUT CUT MEDICARE AND MILITARY AND PUT
MORE REGULATIONS ON CHEAP ENERGY AND MORE PEOPLE ON BIG GOVT PROGRAMS!
You`ll beat 95% of the so-called pros if you put 60% in the S&P and 40% in the total
bond market.The people who lose money in the market are those that get greedy
and take on risk.
thru the 1991, 92, 93 timeslot when the stocks also tanked, i got out of my company 401K. the company provided NO matching, so i saw no value to deposit into such a weak market.
instead i redirected my money into my home mortgage. the best choice i ever could have made which provided it's own returns by accelerating my home mortgage like crazy.
of course the mutual fund people (all the choices we have with 401K programs) didn't get their fees so i'm sure they would STILL say my choice made was a bad one...
but i totally disagree!
note too when it comes time to withdraw and take your funds, it is on THEIR terms and not yours!
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