Friday, September 4, 2009

Top 10 Retirement Planning Mistakes

It is never too early to start planning your retirement. The IRS allows several convenient ways to provide for your retirement with tax incentives. Most of us have a retirement plan (401k, SEP/IRA, Roth IRA, etc.), but don't always utilize it to it's full potential. Here are the top 10 mistakes that slow down your progress.

  1. Not taking advantage of time - The earlier you start, the better. Time works wonders in a tax deferred or tax free account. Too many people make the mistake of waiting to start a retirement plan. Put time on your side. Once again, the earlier, the better!

  2. Non investing on a regular basis - Many people start to invest and then stop along the way. Investing on a regular basis - monthly or annually - is the key to success. Contributions + long term growth = more $$$.

  3. Not taking full advantage of tax-free retirement vehicles - If you can afford to fund your account to the max, go ahead and do so. In a 401k plan it allows you to deduct more money for tax purposes. In the big picture, it gets more money working for you on a tax-deferred basis.

  4. Not creating a retirement plan - As you're approaching retirement, you need a game plan. Figure out how much $$$ you are going to need on a monthly or yearly basis AND the sources of this income. Look at all of your financial sources.... pensions, social security, IRA's, etc. Some people should consider annuity products if there is a risk of running out of money. A lifetime income benefit may provide peace of mind.

  5. Poor asset allocation - It's amazing how many individuals leave their money in a money market fund because it's 'safe'. This may sound like a logical strategy, but unless you have $2 million dollars in your money market account, you're not going to get to the finishing line. Growth is to the key to outpacing inflation, maintaining purchasing power and building wealth.

  6. Forgetting about your 401k plan - Although most employees take advantage of their company plan, there are a ton of people who don't participate. Most firms have some type of company match and not participating in such a plan is giving away free money. Learn all you can about your company plan and be sure to participate.

  7. Cashing out or borrowing against your retirement accounts - This has been an all too common theme in recent years. The weakened economy has forced people to borrow or cash out retirement plans. This is the kiss of death! This is why emergency funds are a vital part of the financial planning process. IRA's and the like are NOT intended for for short term needs (hence the stiff IRS penalties). Leave them alone and let them grow!

  8. Not considering a Roth IRA account - The government deficit is becoming a huge problem. Tax free growth provided by a Roth IRA could be worth its weight in gold should personal income tax brackets escalate. Should you qualify for a Roth IRA, they should be used as part of your retirement plan.

  9. Relying too heavily on social security - The whole intent of social security is to compliment your other sources of retirement income. The system is financially challenged and the financial impact of social security is diminishing.

  10. Don't rely too much on company stock - MCI Worldcom, Enron, Washington Mutual, etc. Need I say more? While it seems loyal to own your company stock, never have more than a 20% exposure to an individual stock.

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