Steer Clear of These 5 Retirement Pitfalls

by Marc Bastow | July 9, 2013 2:34 pm

Retirement1 Steer Clear of These 5 Retirement Pitfalls[1]The halfway point of the calendar is a popular time for less active retirement investors to revisit their portfolios and re-evaluate their strategies.

One way to start that exercise: Don’t crow about what’s gone right, but scour everything to consider what you might be doing wrong.

Sure, it’s not appealing to look at your retirement with a negative bent, but it’s worth it — identifying mistakes early is vital, because the longer they’re allowed to fester, the more of an effect they can have.

So, let’s start with the basics. Here are five retirement pitfalls you’ll want to look out for (and avoid):

Not Maxing Out Contributions

From your first paycheck to your last, contributing to the two most important retirement-planning accounts in your arsenal — 401ks and IRAs — is fundamental to your retirement.

Let’s take the 401k tack first: If you are not already enrolled in a plan, enroll. Now. Once you’ve done that, look through your finances. If you can afford to max out your IRA contributions — $17,500 for those under 50, and $23,000 for those over 50 — do so. That’s doubly important because many companies will actually match some of your contributions — not going after your employer’s maximum match is essentially leaving free money on the table!

The nice thing is, once you’re in, payments will be automatically taken out of your paycheck — something you can’t automatically say about an IRA.

IRAs are a bit different in that while you can also enroll in a program through your employer (and yes, try and do that), a surprising number of people will just sit on their original amount. Don’t. Contribute, and again, contribute to the max — you can add up to $5,550 if you’re under age 50, and $6,500 if you’re age 50 and older. If your bank offers the service, you can set up an automatic deposit at regular intervals, and if not, set up an Outlook reminder, write it on a calendar, put a piece of string on your finger — whatever it takes.

Letting Your Accounts Collect Dust

Sitting on your duff and waiting for your investments to eventually pan out isn’t the worst idea in the world, but it’s not a good one. The investment landscape isn’t static. So get active[2] — that means reviewing your investments on a regular basis, and adjusting based on your asset allocations and market conditions.

Issues of “weighting” might come into play as those changes occur: Let’s say you have $2,000 invested — half in stocks and half in bonds. In a few years, if bonds stay flat while your stocks grow by 50%, you’ll have $1,500 in stocks and $1,000 in bonds, or a 60/40 mix instead of your original 50/50. Depending on your preferred asset mix, you might need to re-balance your allocations.

Not to mention, if the landscape points to a major shift — say, rising interest rates threaten to hurt your bond holdings, or a trend bodes well for a particular asset class — you’ll want to put yourself in a position to win (or not lose).

Ignoring Expenses

Like all good things in life, your retirement ain’t free. Not only do you have to put your own money to work, but you have to pay a 401k provider, mutual fund managers and other others to put your money to work via various fees and expenses.

Thing is, not all those costs are the same — some are more expensive than others, so ignoring these fees and charges when investing can actually impact your returns.

For example, say Mutual Fund A and Mutual Fund B both offer relatively similar exposure and performance in large-cap stocks. Fund A charges 0.5% of expenses, or $50 on every $10,000 invested, while Fund B charges 1.5%, or $150 on every $10,000 invested. Assuming a 6% annual return over 30 years, Fund A would cost you roughly $3,800 in expenses alone, while Fund B would cost you more than $9,500 — and that’s not even factoring in what you’ve lost in opportunity cost.

Here’s something a little less hypothetical: Online financial adviser FutureAdvisor says investors are losing more than $100,000 over the course of 40 years[3] because of fees an expenses. Those numbers are real, and they’re real big. So know your fees.[4]

Cashing Out Early

The rules for taking money out early from a retirement plan are pretty clear-cut, whether it’s an IRA [5]or a 401k[6]. The gist: You’re going to take a big hit unless you really, really need it.

“Early distributions” are classified in both cases as any money distributed before age 59 1/2. Those distributions are subject to a 10% tax on the amount you must include as part of your gross income for tax purposes, on top of any taxes you owe on the distribution itself.

Some early distributions are OK. For instance, you can take out funds for things like a disability, or a qualified first-time home purchase. Of course, sometimes shit happens that doesn’t meet the IRS’ requirements, and you might need to withdraw from your plans, penalty and all. But you should know the actual extent of what you’ll end up losing financially before making that decision.

Plus, having a real number in mind will almost certainly dissuade you from any non-emergencies like that new Porsche.

Taking Social Security Too Soon

This one is a sticky wicket[7], but the decision of when to take Social Security basically boils down to a personal preference built on existing wealth at a given age, job situation and retirement time horizon.

First things first: Make sure you actually enroll[8].

But before you rush in early (you actually can start taking Social Security as early as age 62), remember this: The longer you wait to take Social Security, the more your benefits grow — at least until you reach your Full Retirement Age, which is when you’ll finally max out your possible monthly check.

You can determine your FRA by using the Social Security Administration’s calculator here[9], and you can learn more about how your monthly check is calculated[10] here.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2011/12/Retirement1.jpg
  2. So get active: http://investorplace.com/2013/02/3-ways-to-manage-your-way-to-retirement-idu-xom/
  3. are losing more than $100,000 over the course of 40 years: http://money.cnn.com/2013/03/27/retirement/401k-fees/index.html?iid=HP_Highlight
  4. So know your fees.: http://investorplace.com/2013/05/keep-your-eye-on-the-401k-expense-line/
  5. IRA : http://www.irs.gov/taxtopics/tc557.html
  6. 401k: http://www.irs.gov/Retirement-Plans/Plan-Sponsor/401%28k%29-Resource-Guide---Plan-Sponsors---General-Distribution-Rules
  7. sticky wicket: http://investorplace.com/2013/01/planning-to-retire-at-55-please-think-again/
  8. actually enroll: https://secure.ssa.gov/iCLM/rib
  9. here: http://www.ssa.gov/pubs/ageincrease.htm
  10. how your monthly check is calculated: http://investorplace.com/2013/05/how-to-better-understand-your-social-security-check/

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