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.
More from Bankrate.com:
VIDEO ON MSN MONEY
< No.7 > A SURE-FIRE WAY TO RUIN YOUR RETIREMENT IS TO INVEST YOUR ASSETS, ESPECIALLY YOUR RETIREMENT SAVINGS, WITH FISHER INVESTMENTS! TO THE CONTRARY, VANGUARD GROUP, INC. OFFERS MANY EXCELLENT MUTUAL FUNDS WITH OUTSTANDING PERFORMANCE (% RETURNS) WITH VERY LOW EXPENSE RATIOS STARTING AT 0.25%. COMPARED TO FISHER INVESTMENTS' EXPENSE RATIO OF 1.36%, VANGUARD'S IS ALMOST 1/6th OF WHAT FISHER INVESTMENTS CHARGES! IN OTHER WORDS, FISHER INVESTMENTS CHARGES ABOUT 550% OR 5.5 TIMES MORE TO MANAGE YOUR RETIREMENT ACCOUNT THAN DOES VANGUARD, BUT FISHER INVESTMENTS PERFORMANCE IS RATED "POOR," AT BEST (5 years annualized returns = 0.41%). As a former FISHER INVESTMENTS client, I speak from my own personal investing experience -- FISHER INVESTMENTS will literally devastate your retirement portfolio as it did mine! Give yourself and your family a GOLDEN OPPORTUNITY to enjoy a financially successful future/retirement -- BE AWARE and BEWARE of FISHER INVESTMENTS! Scrutinize the data below for yourself; keep track of the PURISIMA TOTAL RETURN MUTUAL FUND (PURIX) on this MSN Money website. MorningStar data and statistics (shown below) tell the REAL STORY about FISHER INVESTMENTS; DO NOT fall for their slick, emotionally-charged "snake oil" ads on MSN Money and most financial websites:
(PURIX), A Mutual Fund “Actively” Managed by FISHER INVESTMENTS (KEN FISHER, CEO and Principal Owner). The Portfolios of FISHER INVESTMENTS “Private Client Group” Mirror This Data and Performance Returns!
**(2-Stars in 5-Star Rating System)
Net Asset Value (NAV)
1.36%, EXORBITANT in relation to its POOR PERFORMANCE*
* (% annualized returns)
Last NAV update 1/25/2013 4:00 PM ET
CUMULATIVE PERFORMANCE OF $10,000:
Year to date performance as of 1/24/2013 7:00 PM ET
* Annualized returns. Performance as of 1/24/2013 7:00 PM ET
Avg Market Cap
The Morningstar Rating for mutual funds, commonly called the "star rating," brings both performance and risk together into one evaluation. Morningstar adjusts for risk by calculating a risk penalty for each fund based on "expected utility theory," a commonly used method of economic analysis. Although the math is complex, the basic concept is relatively straightforward. It assumes that investors are more concerned about a possible poor outcome than an unexpectedly good outcome and that those investors are willing to give up a small portion of an investment’s expected return in exchange for greater certainty. A "risk penalty" is subtracted from each fund’s total return, based on the variation in its month-to-month return during the rating period, with an emphasis on downward variation. The greater the variation, the larger the penalty. If two funds have the exact same return, the one with more variation in its return is given the larger risk penalty.
FISHER INVESTMENTS Strikes Against Former Client - a Newspaper Publisher
After a former client of FISHER INVESTMENTS, Jake Berzon (a newspaper publisher) wrote an opinion piece about FISHER INVESTMENTS, the company (FISHER INVESTMENTS) filed a frivolous arbitration case in an effort to intimidate this member of the press.. Breaking news from by Baraban.Com Odesskiy Listok / David Lusher/ in Fisher Investments,intimidation,interference,snowball,first amendment,freedom of the press, Investment .
FOR IMMEDIATE RELEASE -- (FREE PRESS-REALEASE.COM) February 24, 2008:
Jake Berzon, publisher of Odesskiy Listok newspaper was looking to free up some time from money management tasks to concentrate on pressing business and family matters. He thought he found his answer when he contracted with FISHER INVESTMENTS - a large private investment management company in Woodside, California. Their business relationship was a short-lived one, with Berzon firing Fisher within a month of hiring them. Berzon explains that his dissatisfaction with FISHER INVESTMENTS tactics grew daily: "Flashy "personalized" documents loaded with the same regurgitated rubbish rubbed me the wrong way right away. That was followed by tomes of required additional paperwork. Then, there was the unwillingness to communicate by email and refusal to supply basic performance data. The mutual fund-like positioned account didn't seem to make much sense, either. And it seemed like every security being added to the account immediately lost in value and significantly more so than the market in general. It's like FISHER INVESTMENTS knew exactly what not to buy!" Three weeks after canceling their contract, gathering additional data and analyzing FISHER INVESTMENTS practices, Berzon wrote an expose on FISHER INVESTMENTS posting it in on the newspaper website. The article quickly appeared at the top of search engines' rankings. And that's when FISHER INVESTMENTS, apparently took notice. First there was a call from a FISHER INVESTMENTS VP, who asked what FISHER INVESTMENTS could do to make Berzon happy. "There are only two things you can do, change your marketing materials to correspond to your business, or change your business to correspond to your marketing." Berzon thought that was the last that he heard from the company. Then in the evening of Friday, February 15th prominently among other responses, appeared a letter posted by FISHER INVESTMENTS legal counsel, Fred Harring. In it Haring was threatening legal action, claiming defamation of character based on misstatement of facts; raising demands for article removal and a published retraction. The following Friday, Berzon received a notice from FISHER INVESTMENTS outside counsel about their arbitration filing in San Francisco. This filing claims breach of contract, intentional interference with prospective business relations, defamation, trademark infringement, trademark dilution, injury to business reputation, unfair competition and unjust enrichment. Berzon is not folding: "I wrote down the facts and my opinions about FISHER INVESTMENTS. Their $2,000 breach of contract claim - just a poor ploy to attempt to use the canceled contract's arbitration clause and scare me into shutting up. Well, that's not going to happen; besides I have an email from their sales person confirming that I owe nothing! And by the way, over the past two weeks, I have done more digging, more research, more analysis and it will all be in the new article - a Fisher Investments feature story for the March issue of Odesskiy Listok."
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