By Jeff Rose
We all want to live comfortably in our retirement years. But, unfortunately, not all retirees are able to achieve this.
Sometimes the reasons are innocent enough: The entire market crashed right before retirement, unforeseen medical bills ransacked a retirement account or a mischievous lawsuit caused irreparable damage. While there are some ways to reduce the likelihood of these unexpected financial catastrophes, there are other instances where, through a moderate to high degree of negligence, you disrupt your own retirement plan. Careless mistakes can cost a lot, and some people never recover financially.
Here are some ways to botch your retirement plan you should take care to avoid:
- Waiting until tomorrow to invest. People procrastinate saving for retirement for a variety of reasons. Sometimes they’re living paycheck to paycheck. Other times they are confused about their options. Occasionally, they don’t even realize they should be saving in the first place.
You probably know you should save, but there might be something holding you back from starting. While there are some legitimate reasons to delay investing for retirement, it should be a high priority on everyone’s to-do list. “We often do not manage our personal affairs in the timely way we should; we tend to push off doctor’s appointments, avoid obvious health matters,” says Ronn Yaish, a wealth advisor at Yaish Financial Services in Bergenfield, New Jersey. “When it comes to our personal financial health, some of us tend to shift into avoidance mode, even though most of us may know or understand the benefit and dramatic impact early planning can have on our financial situation.”
If you’re not sure where to start, begin by taking a look at the Roth IRA. Roth IRAs are most beneficial for those who think their tax rate is going to be higher in their latter years than it is now. Roth IRAs allow you to grow your retirement account without having to pay taxes on the interest or principal when you take the money out at retirement. Instead, you pay taxes on the money during the year in which you invest the money. Since you pay now, you don’t pay later.
Alternatively, you can go with a traditional IRA, but you’re going to pay taxes on the money you take out of the plan. So compare your current tax rate to what you expect your future tax rate to be and choose wisely. But regardless of which type of IRA you select, start your retirement account as soon as possible. You’ll be glad you did.
- Put all your eggs in one basket and lose most of them. Neglecting to diversify your portfolio can result in big losses that you don’t have time to recover from. “I always share to my clients never to ‘marry’ an investment, especially individual stocks. We always just want to long term be “dating” a stock,” says Humphrey Thomas, a Brownsville, Texas, financial advisor with HG Thomas Wealth Management. “Once the relationship with a particular stock is not beneficial anymore we should be moving on.”
Sometimes people want to invest in their favorite tech or automotive company. Other times they want to keep their money invested with a company they have worked at for decades. In either case, it’s best to sell any positions that are over weighted and invest in mutual funds or exchange-traded funds that diversify your savings. “Often times when clients feel they are behind where they should be, they want to take unreasonable risks with their portfolio,” says Benjamin Brandt, a North Dakota financial advisor and founder of RetirementStartsToday.com. “Many clients would be better served by simply working longer and pursuing a measured investing approach, rather than attempting to make up for lost time with extra-risky bets.”
- Don’t sit down with a financial planner. Any destination worth reaching requires a plan to get there. The same is true of retirement. Sometimes what people think they should invest in doesn’t always align with where they really should be investing. By sitting down with a financial planner who is looking out for your best interest and isn’t trying to sell you something, you can get a comprehensive retirement plan that has a high probability of meeting your needs.
Here are two questions good financial planners are trained to answer:
- How much money do you need for retirement to meet your income needs?
- How much money do you need to invest in order to achieve your retirement account goal?
By gathering your information and thinking carefully through your unique situation, financial planners can give you a realistic plan of action. A financial planner can help you determine where to invest $100 per month, or if you need to increase your savings rate to $150 or $300 monthly. Sit down with a financial planner so you don’t botch your retirement with guesswork. “What I often see are awful allocation and contribution choices. I have worked with some clients who, within 5 years from retirement, had over 95 percent in stocks,” says Joseph Carbone, a wealth advisor for Focus Planning Group in Bayport, New York. “If they would have worked with a professional the potential for disaster could have been avoided.”
- Raid your retirement account to buy stuff you don’t really need. I once had a client who took a huge chunk of money out of his retirement account to buy a brand new truck. Please don’t do that. Remember, when money is in your retirement account, it’s money that’s making money. When your money makes money, that new money makes more money.
Therefore, when you take money out of your retirement account, you’re not just losing the money you used to buy stuff you don’t really need, but you’re also losing all of the potential dollars you might have earned had you kept the money where it belongs. Further complicating an early distribution are taxes and early withdrawal penalties. You can avoid all of these problems if you keep your retirement account for retirement.
It’s not always easy to make smart choices when it comes to your retirement plan, but it’s not rocket science. A few simple preparations can help you to avoid big retirement planning errors.
Jeff Rose is a certified financial planner, U.S. combat veteran and the founder ofGoodFinancialCents.com.