11 Most Common Retirment Planning mistakes!
Most people think that just by having a retirement plan they will be financially sound and secure when they are ready for retirement. However, this is the most common misconception and if you are one of those people making the following retirement planning mistakes you will be in for a nasty surprise which could result in a possible disastrous financial retirement situation.
1. Retirement Planning Procrastination.
This is the most common mistake and all financial planners urge their clients that “the sooner you get started the more you will be able to contribute, and this in turn leads to be better stream of retirement income”.
2. Not taking retirement planning seriously.
This is especially true of younger people who really either don’t understand or are simply not interested in understanding this process. Clearly, the earlier one starts this process the larger the nest egg come retirement. People tend to worry about retirement once they have fulfilled all their financial priorities such as paying off their home, funding their children’s education, paying off their BMW’s etc. However, retirement experts have urged people to view retirement planning with a very high sense of urgency and importance.
3. Most people tend to misjudge their own financial needs at retirement.
Retirement can last a long time and inflation can double or treble the cost of living in 30 or more years down the road. Therefore, one must take future cost of living consideration in mind when considering the retirement planning process. Also, with rising life expectancy the need for substantial retirement assets is required to support the increasing cost of retirement expenses.
4. Not maximizing your company retirement benefits.
Most people do not maximize their retirement contribution into their company retirement plan. In some cases they don’t invest enough to achieve their company matching funds that are being offered. Clearly, this is a missed opportunity to increase the size of the nest egg come retirement age.
5. Withdrawing money from your retirement plan.
People that are constantly withdrawing money from their retirement plans will lose valuable interest or stock market gains. Also, you must be careful when taking advantage of these withdrawals as you could face penalties or early withdrawal fees if these loans are not paid back on a timely basis.
6. Relying on Social Security or any Government Sponsored Plans for your retirement income.
There is a tremendous debate both in the Congress and our country, that there may not be sufficient trust funds available to cater for the baby boomer retirees. Whilst this may not be entirely true, one should be aware of this dire situation, and you should have a provision in place as a back up. It's best to have some sort of a pension plan such as a company pension or a private retirement plan along with some personal savings in addition to social security when you retire.
7. Passing up the opportunity of a direct rollover when you change jobs.
Even if you plan to reinvest your retirement assets on your own, if you take a distribution that is not classified as a direct rollover your employer is required to withhold 20% for taxes. If you leave your employer, use a direct roll over to transfer your entire retirement account to an IRA or into your new employer’s retirement. This will keep intact your entire original sum of retirement assets from the old employer.
8. Relying on your spouse's retirement.
This is a very common occurrence especially in some corporate pension plans, where benefit accrues to only the employee as long as he or she lives and the survivor spouse gets nothing! So if one spouse relies on their spouse's retirement plan for their own retirement, they could be in for a very sad surprise. The spouse with the retirement plan could die leaving the other spouse with no income. It is highly recommended that each individual spouse maintain their own separate retirement plan as this is the best retirement strategy to maintain a long term security.
9. Succumbing to the temptation of taking early distributions.
An early distribution from your retirement savings plan before you turn 59 ½ will result in a 10% early withdrawal penalty from the IRS in most cases, and a further income tax on that amount is due based on your regular tax. This will contribute to a rapid depletion of your retirement nest egg.
10. Take a lump sum at retirement.
If you keep your distribution, your income tax bill that year could be staggering. Instead choose to move funds from employer plans into an IRA to maintain tax-deferred status
11. The Retirement Plan portfolio is haphazardly selected and poorly managed.
It is important to monitor your investments constantly and regularly. A poor asset allocation can be financially disastrous. Here are some of the most common mistakes made as far as the portfolio and selections processes are concerned.
* Relying too heavily on your company stock or not having a diversified portfolio. This is a very dangerous strategy, remember Enron Corporation and WorldCom, both were great stocks, but both went bankrupt during lean times. It is always a good strategy to diversify.
* Attempting to time the market. Never attempt to time the stock market, also always pursue a strategy that is consistent with a long-term approach. The best option to pursue is a strategy that matches your investment time horizon to your retirement goals. The subsequent collapse of the bull market should dissuade investors pursuing short term strategies.
* Not screening your broker/financial advisor. If you are going to entrust your retirement savings to someone, it is highly recommended that you check their professional credentials and track records.
* Not rebalancing your Portfolio. Your portfolio’s asset allocation can change when the financial performance of one asset class does well and another doesn’t. Review at least annually and rebalance if needed. The rebalancing strategy of your asset allocation should be consistent with your investment goals.