Avoid Common Retirement Mistakes
Some of these mistakes take place while you're planning for retirement, and some take place after you actually retire. Here are seven of the most common mistakes.
1. Ignoring your company's 401(k) plan. If you're planning on retiring well, you should make every effort to maximize contributions to your 401 (k) account. The total amount that you can contribute is substantial ($15,000 for 2006; up to $20,000 if you're 50 or older). In many cases, your employer matches a portion of your contribution. These funds avoid current income taxation and are allowed to grow tax-deferred.
2. Allowing your personal savings to lag. Many people believe that if they max out their
company retirement account, nothing else need be done. That's simply not true. It's also the time to rev up your personal savings. Properly invested, these savings can grow using preferred tax rates, adding substantially to your retirement funds.
3. Mismanaging your investment mix. The investments that you hold need to change as your situation changes and as you get closer to retirement. The proper asset allocation for people in their twenties is different for those in their fifties. Don't just blindly allow your investment holdings to remain unchanged in the hope you're doing the right thing.
4. Outliving your money. That simply means that as you come to the end of your earning years and certainly during retirement, you must ensure that your lifestyle doesn't outpace your income. There are many things leading up to and during retirement that you can't control. But modifying your lifestyle to fit your income is one thing you can control.
5. Paying too little attention to your debt. Avoid piling up new debt in the years leading up to retirement. You might have to make difficult choices during this time, but falling deeper into debt can sabotage your retirement plans. Remember that once you've reached retirement, it's not as easy to payoff any additional debt that you might incur.
6. Underestimating health care costs. A recent study concluded that retirees who are not covered by their former employer's health plan might spend 20% to 40% of their retirement income on health care. Sure, Medicare will pick up some of the slack once you reach age 65, but for many early retirees, the cost of health care can be staggering.
7. Retiring too soon. Picking the right time to retire takes careful analysis. Start by creating a retirement budget. Will you be able to cover fixed expenses, daily living costs, and the one-time splurges of retirement? Will there be uninsured medical expenses? If your financial situation is less than secure, you may want to postpone your retirement.
Working longer can increase your pension or retirement assets when you do eventually retire. Having a larger retirement fund will give you more choices to realize your desired retirement lifestyle.
Avoiding these mistakes won't necessarily guarantee you a financially secure retirement, but it will certainly improve your chances.