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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speaking of the economy i say go to we the people where i have created a petition because of these financial issues our country face.
Here's some more information about this petition:
Reform Social Security To Allow All Who Have Completed Their
Quarters To Withdraw Their Monies (All or Partial) Untaxed!
My formula has been to save 10% minimum of my gross in savings, then my age in decades in fixed/stable, then the rest in a mix of stocks (US and OUS). In my youth, it was a higher risk stock selection, which decreased with age.
I also hedged on the age in decades, lagging until my mid 40s (i.e. in my 20s it was 10% fixed, 30s 20% fixed, etc) but now matching at over 50% in my 50s. I check to see if I need to re-balance near the end of each year, frequently it has been fine as I don't fret over a few % here or there due to fluctuations. No matter how long I live I will always have some portion in stocks.
I have not followed the advice of only 10% max in my company stock but this is purely due to my confidence in my company/industry. It is somewhat insulated to wild fluctuations in that it has patent protection on products and very high cash flow, even in down years. I still occasionally sell stock in the plan to take profits, but with stock splits and a few bursts of rapid growth it has surged to close to 30% at times. I have taken enough profits from it to get back all of my and the company matching money, so in my mind it is freebie and growing on its own now. But this is a unique situation and even then with all of the high ratings and visible income/patent dates known I still watch it.
End result over 33 years was ~ 975k, as of yesterday - much of the growth has been the last few years as compounding kicks in. The % fixed is holding it down some now, but I actually increased that recently to protect against (my perception of) a potential downside in the market over the coming year/few years (special circumstance). However, if inflation takes off along with interest rates then I may leave it there is we head back to traditional rates of 5-8% on fixed.
It can be done, just set a plan and stick to it. Pay yourself first, never take out of it. Good luck to all !
Another article that refuses to mention personal choice retirement accounts. (Maybe the authors are Jews.)
I'm going to log off, pour a glass of wine and listen to the soundtrack of "The Civil War" by Ken Burns on Public Television based upon Shelby Foot's three-volume book on the Civil War.
That lilting violin solo is so haunting. It used to make my Dad cry.
From Fort Sumpter to Perryville.
From Fredrickburg to Meridian.
From Red River to Appomatox.
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