8 Retirement Planning Mistakes to Avoid

In a recent survey, only 13 percent of respondents told the Employee Benefit Research Institute they’re very confident they’ll be able to afford a comfortable retirement. Meaning, 87 percent of respondents weren’t sure they’ll be able to continue their quality of life after leaving the workforce.

Those are scary numbers, but you can eliminate much of the worry by avoiding the common retirement planning mistakes people make. In the video below, Money Talks News founder Stacy Johnson explains how you can do that. Check it out, then read on for advice.

1. Failing to plan

In another section of the survey, only 23 percent of respondents told the Employee Benefit Research Institute they were very confident they’re doing a good job of financially preparing for retirement. Failing to plan is one of the biggest mistakes you can make. If you don’t have a plan, spend a weekend hashing one out. Here are some questions to ask yourself:

  • What do I want to do in retirement? Should I save for travel or hobbies?
  • How much will I need to cover my expenses?
  • How much do I have saved now?
  • What is my goal amount?
  • How much will I need to reach my goal?
  • How much should I put aside a month to get there?

2. Starting too late

I started saving for my retirement at 18 because my parents convinced me to sign up for my company’s 401(k) plan. At the time, it was just a few bucks a month, but that seed money has had time to grow. If I’d started now, I would have missed out on 11 years of compound interest.

Bottom line: The sooner you start saving, the bigger your pot of money will be when you’re ready to quit work.

3. Not taking advantage of 401(k)’s

If your company offers a 401(k) plan and you’re not contributing, you’re making a huge mistake. Contributions to your 401(k) come out of your paycheck before taxes, meaning it’s a portion of your income that you won’t pay taxes on now. And many employers have a match program, meaning they’ll match your contributions up to a certain percentage, which is free money.

Talk to your human resources office about your company’s 401(k) plan and sign up ASAP.

4. Not understanding the risks

Stocks come with risks, but if that’s causing you to shy away from stocks entirely, you’re depriving your retirement account of an opportunity to grow. On the flip side, you could be taking on too much risk. If you have an aggressive retirement plan loaded with high-risk stocks, you might end up losing a big chunk right before you retire.

Stacy, in a post for beginning stock investors, offers this advice:

I suggest subtracting your age from 100, and putting no more than the resulting percentage of your long-term savings into stocks. So if you’re 25, 100 minus 25 equals 75 percent in stocks. If you’re 75, you’d only use stocks for 25 percent of your savings.

But as I also said, that’s just a rule of thumb. If you’re nervous, you’ve invested too much.

5. Relying on Social Security

If you’re relying on Social Security to keep you solvent in your golden years, you might be setting yourself up for disaster. Use the Social Security Administration’s Retirement Estimator to see an estimate of your Social Security benefits. Also sign up to see your Social Security statement online.

Odds are, it won’t be enough. The maximum Social Security benefit this year for someone who retires at full retirement age is $2,533 and only $1,923 if you take early retirement at age 62.

6. Underestimating health care costs

If you assume your health care costs will be covered after you qualify for Medicare at age 65, you might be in for a rude awakening when you retire. Fidelity Investments says a couple retiring in 2013 will need $220,000 on average to cover health care costs in retirement. That’s not including nursing home or other types of long-term care.

Fidelity adds that “retirees now spend more on health care than they do on food.”

7. Borrowing from your future

You can borrow from your 401(k), but that doesn’t mean you should. I worked for a company that actually encouraged people to borrow from their 401(k)’s to cover expenses like a new house or car. You will have to pay it back, but in the meantime your retirement funds won’t be growing as much as they otherwise would if you had left that money in the account.

8. Cashing out early

If you quit your job, you may be tempted to cash out your 401(k), but do so and you’ll not only owe taxes on the amount but you’ll face a 10 percent penalty. If you cash out your 401(k) before your retirement, you’ll have to pay taxes on any money you collect. Instead, roll your 401(k) into an IRA and stay tax-free.

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Comments & discussion

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  • Antoinette Kizak

    My husband and I were on track for a decent retirement, planned to have a paid off house, invested almost the max to retirement every year- and retirement looked like it would be ok for us until I had no choice but to divorce my husband. The divorce has left me in the worst financial shape I have been in as an adult. I would like to see an article that addresses recovering from divorce debt (seemingly impossible) and trying to save for retirement (yet alone college and other expenses for the kids) simultaneously! It just isn’t possible for me to save as I did before as I already must charge when something major needs replacement because the divorce ate up all savings that I used to have for emergencies. Let’s see advice for divorced people, please! I am sure that people who have lost jobs and have had to use up their emergency funds feel the same as I do. I live very frugally already. Shouldn’t I build up a new emergency fund first? What about the divorce debt?. My one vice is I insist on a modest vacation every year. I refuse to give up an annual vacation when what I would really like to do is travel in Europe for a few weeks!

  • SpynCycle

    There are no taxes when you roll the 401(k) balance into a IRA, as long as you follow all of the rollover rules. If you take the 401(k) balance and withdraw it, there are taxes, and possibly penalties, depending upon your age.