Whether the perfect retirement to you means cruising around the world or simply curling up with a good book, you surely want to be able to retire comfortably. A little time spent on Google, however, can bring up oodles of alarming retirement statistics. For instance, more than 900 of 1,000 people in any given retirement plan will either retire in poverty or run out of money before they die, retirement expert Brooks Hamilton said in an interview with PBS’ Frontline.
How do you avoid becoming one of these scary statistics? What any financial adviser would want for you is to be educated enough on retirement savings so that you stay on the right track. Whatever your plans are, you surely don’t wish to spend your golden years flipping burgers and suffering financially.
Here are eight retirement planning mistakes people make that have financial advisers banging their heads in frustration every single day. We’ll also share some advice from financial experts on turning these mistakes around.
1. You’re not paying down your home costs
- Home equity loan debt can be disastrous in retirement.
Whether it’s in the form of your mortgage or a home equity loan, this debt should be getting smaller as you age. Why is this important? Entering retirement with home-related debt you can’t afford is a recipe for disaster. This will make covering your other retirement expenses tricky.
To avoid this pitfall, prioritize repayment of all home-related debt before you retire. This especially applies to the potential trap of home equity loan debt. “If a client can pay off the home equity line, it generally will get them to a state of debt they can support with what they want to live on in retirement,” Judy McNary from McNary Financial Planning told LearnVest.
Next: There are no scholarships for retirement.
2. You prioritize college funding over retirement
- There are no scholarships for retirement.
While your kids can borrow money for college and obtain scholarships, you can’t get similar help paying for retirement. If you’re taking from your retirement savings to fund your kids’ college, you’re making a risky gamble. What if you get laid off, suffer illness, or experience other financial setbacks?
If you’re a younger parent, save for retirement early (so interest has more years to compound) and then put what you can afford toward your kids’ education funding, Mary Beth Storjohann, author of Work Your Wealth, told U.S. News & World Report. If your child is approaching college, find creative ways to help pay for it. Bottom line, everyone will be better off if you don’t deplete your retirement fund and then need to knock on your children’s doors when you’re in your 80s, asking for financial help.
Next: Don’t lose track of old accounts.
3. You haven’t consolidated your accounts
- When switching jobs, pack up your retirement account along with your desk plant.
Throughout your career, chances are you’ll set up multiple 401(k) accounts under different employers. It may be helpful to consolidate those accounts into one place. It’s possible to forget about accounts as the years go by. “Not only is it a case of people forgetting where their money is or how to access it, but other things can happen as well, like your former employer changing your investments and notifying you at the out-of-date address they have on file … so you never find out,” said Katie Brewer, CFP with LearnVest Planning Services.
A 401(k) account can be rolled over into a traditional (pre-tax) IRA. You can set up an account and move your money using an investment management manager such as Vanguard.
Next: Don’t give Uncle Sam free money.
4. You borrow against your retirement fund
- Borrowing $10,000 could reduce your balance at retirement by $100,000.
Retirement accounts have become America’s new piggy bank. Since the 2008 credit crisis, they have replaced home equity loans as a place people borrow cash. You may think, “What’s the big deal? I’m just borrowing from myself for awhile.” Well, there are at least 99 reasons why you should never borrow from your 401(k). One big one is Uncle Sam has his hand in that money, since it’s pre-tax. And he requires you to pay back the amount you borrowed, usually within five years. The penalty for not doing so? The loan will be considered a distribution and subject to income tax and maybe early withdrawal penalties.
The IRS collected $5.7 billion in penalties in 2011 for early withdrawals from retirement accounts like 401(k) plans. “Discipline yourself to avoid borrowing from your 401(k) retirement plan or any other workplace retirement plan – no matter matter how badly you need cash,” said CNBC contributor Ric Edelman, who listed a host of additional reasons why you shouldn’t borrow from your 401(k) account.
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5. You don’t have a written plan
- Those with written plans may retire with 5 times more money than those without.
Would you go on vacation without having a plan of things to do? Sadly, while many people plan their vacations meticulously, they don’t use the same care when planning for retirement. The typical advice is you should aim to replace 70%-90% of your pre-retirement income.
To get started with a retirement plan, set specific, measurable financial goals. Write them down. One study showed people with written plans had on average five times more money at retirement than those without written plans. Make use of online tools such as this retirement calculator and a home budget calculator to determine how much in savings you’ll want to incorporate into your plan.
Next: Use the opportunity to reinvent yourself.
6. You assume you’ll want to stop working
- Working in your golden years could mean reinventing yourself.
Fortune recently reported that around one in five Americans over 65 is still working. This figure is at its highest in 55 years. Even if you’ve been diligent enough to reach your retirement funding goals, you may desire to work at least part-time well into your golden years. “The majority of retirees are bored silly,” Ken Dychtwald, founder of think tank Age Wave, told Fortune. “Now it’s less about retirement and more about reinvention.”
Continuing to work past retirement age could stimulate your brain – and help financially, considering how Americans are living longer. Rather than planning to stop working cold turkey, start thinking about what jobs you might enjoy doing. For some, this could be a refreshing change from the job you’ve been grinding away at for the past 40 years.
Next: Do your kids a big favor.
7. You overlook estate planning
- Don’t make your children lose a chunk of their inheritance to Uncle Sam.
While you may be on track with your retirement planning, don’t overlook another important component, which is estate planning. Once you pass away, how will money left over transition to your children? They’ll lose a big chunk of the money to Uncle Sam if you don’t have a plan in place. If you have a will, the probate process in many states is lengthy and expensive. Another option to consider is a living trust. Unlike a will, assets in a living trust generally pass to heirs sooner. “Transferring assets into a trust could save months and thousands in legal fees,” said Russell Fishkind, a lawyer and author of Probate Wars of the Rich and Famous.
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8. Your investments are allocated poorly
- You may need to rebalance every 12-18 months.
Getting your asset allocation wrong is the worst mistake investors can make, Michael Neuenschwander, certified financial planner and certified public accountant with Outlook Wealth Advisors in Houston, told U.S. News & World Report. If you manage your own asset allocation, you’ll need to rebalance every 12-18 months to keep your allocation from being skewed.
There is no one-size-fits-all formula for how to allocate your retirement investments. Your age, risk tolerance, and other factors determine your ideal allocation of stocks, bonds, and cash. You may wish to seek help from an adviser in allocating your funds. Be aware that most 401(k) plans have a target date fund option which automatically diversifies for you based on the year you wish to retire.
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