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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Mistake No. 4: Leaving the account in limbo
Just leaving your retirement account with a former employer is also a bad option, Hottin says.
"If your former company downsizes or is acquired by another firm," he says, "finding some contact who can help you retrieve it at a later time could be a hassle.
"It's better to take your 401k with you and mix it in with your new employer's plan -- or roll it into an individual retirement account of some type so you can manage it a bit better." If you do an IRA rollover, make sure it's a trustee-to-trustee transfer.
Rolling it into your new employer's account will give you continued creditor protection, says Green. "Even if you default on loans or you're a defendant in a lawsuit and lose, nobody can touch the money in your 401k or 403b." Depending on the state you live in, he says, your money might also be protected in an IRA.
Mistake No. 5: Too much company stock
Financial advisers say you should have no more than 10% of your retirement account in your employer's company stock. If you're concentrated in a single security, you get hit with a double whammy if your company hits hard times and you lose your job.
"Having company stock in a 401k plan is good for the company in a few ways, but it's a bad idea for the nonowner employees in many ways," Gordon says. "If you're thinking, 'What about the Facebook or Google employees who are now millionaires because of their stock?' don't confuse luck with skill. On the streets of this nation, there are many former employees of Enron, PanAm, WorldCom and others who also believed in their company's stock."
Sometimes, companies make their stock available to employees at a discount through stock options or other direct-purchase programs, he says. If you're tempted, "you are probably best served by taking advantage of the discount and realizing the gain on the discount as soon as (feasible)."
Mistake No. 6: Ignoring the big picture
Your employer-sponsored retirement plan is just one leg of the proverbial three-legged stool of a retirement plan.
"One of the largest mistakes is lack of planning in a holistic sense," Hottin says. "People fail to consider their retirement plans as part of the bigger picture. Your employee retirement account should be part of an overall strategy of financial well-being."
In other words, Green says, the term "retirement plan" should refer not just to tax-qualified plans such as IRAs and 401k's, but also other sources of income such as Social Security, company pensions, part-time work and other money saved up -- "your overall plan for how you're going to get through the remainder of your life."
Of course, many variables are beyond your control: You don't know how long you will live, how your investments will perform or whether you'll encounter an unforeseen expense that could derail your plans. So the best way to plan for the unexpected is to spend less, invest as much as you can and choose investments wisely.
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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 !
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.
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.
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!
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!
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.
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