Thursday, April 16, 2009

6 Ways to Ruin Your Retirement Plans

Longevity is the single greatest advancement in the last 100+ years. Due to medical technology, we are all living longer than ever before. If 60 is the new 40 and 50 the new 30, we have many years of healthy living ahead of us! Should you have the option of retiring at 60 or 65, you could live 30+ years in retirement. For many, this will last longer than your career(s).

Your retirement nest egg is going to be more important than ever. Here are 6 common mistakes to avoid:

  1. Save Little or Nothing - Most people spend more than they make. This is a fact. How do you think the average consumer has $7,000 in unpaid credit card balances? We live under the banner 'consumption nation' and spending is the American way. However, if you want to retire one day, curbing your spending habits and saving more money is going to be imperative. Try and save 10% of your of your annual pay. This may not happen all at once. So, try starting with 4% and gradually increase your savings as you adjust your budget.

  2. Invest too Conservatively - We all know people who invest in money market accounts via their 401k plans or IRA accounts. This is akin to travelling cross country and buying a bicycle for the trip. Yes, you will eventually get to your destination, but boy is it going to take a long time! If you have 10-20 years before retirement, you need growth in your portfolio - a plane, car or motorcycle is a better mode of transportation! If nothing else, you have to outpace the rate of inflation just to maintain your purchasing power. With historic inflation rates averaging 4% per year, today's money market account and CD rates of 2%-3% fail to keep pace.

  3. Ignore Tax Benefits - Tax deferred or tax free growth is a blessing in disguise. Because of compound interest, money will grow faster inside a qualified retirement plan (401k, Traditional IRA, Roth IRA, etc.) than outside. Also, because income tax brackets will probably be increasing in the very near future, do not underestimate the benefits of tax FREE growth offered through a Roth IRA.

  4. Overestimate Portfolio Growth - The days of annual growth ranging from 10%-12% per year are gone. Yes, we may have some bounce back years after 2008. But, because business models are changing (less borrowing, leverage, etc.), companies will grow at slower rates going forward. Keep your expectations realistic.

  5. Ignorant about Investments - When it comes to your investments, ignorance isn't bliss! Owning several mutual funds doesn't guarantee diversification. As a Certified Financial Planner, I've always encouraged clients to learn more about their investments & portfolios. "The more you understand, the easier my job" has been my mantra for over a decade. Having a general understanding of your investments is a must.

  6. Set it & Forget it - Monitoring your portfolio is critically important. This doesn't mean you should check the daily changes, but a quarterly review is certainly warranted. If your mutual fund built it's reputation on a certain portfolio manager calling the shots, make sure the individual is still at the helm. Also, check to see if the fund objectives are still the same. It's easy to say I own the "ABC Fund", but that's the same as saying I own the #8 car in the NASCAR race. If Dale Earnhardt, Jr. is still the driver, you're in great shape. However, if the up & coming college kid is in the driver's seat, it may be time for a change.

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