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9 Retirement Killers

Retirement is the No. 1 goal of investors. Yet, looking at the numbers, it's clear that many investors are undermining their good intentions with unfortunate actions. Here are nine mistakes to avoid if you want your retirement dreams to come true.

1. Cracking your nest egg before retirement. A study by Hewitt Associates found that 45% of workers cash in their 401(k)s when they switch jobs. In other words, they take the money -- paying income taxes and a 10% penalty if they're not yet 59 1/2 years old -- rather than leave it in a retirement account. That's no way to build the retirement of your dreams.

When you change jobs, you can transfer the money in your employer-sponsored retirement plan to an IRA, which will allow the money to continue growing tax-deferred. You might also be able to leave the money in your old plan or transfer it to the plan at your new job, depending on the two plans' rules. But your best bet is the IRA. You'll have many, many more investment choices, usually at far lower costs.

2. Spending your retirement money way too early. Cashing in your 401(k) at a young age isn't the only way for your retirement to meet an early demise. Not saving enough in the first place will guarantee that your retirement will be DOA. Of course, no one wants to be told to "save" -- it's so boring, so ungratifying, almost Puritanical.

But this is what low-savers (and non-savers) really are doing: They're spending their retirement now -- which may mean they won't be able to retire at all. Buy that Coach purse now, or buy time in retirement tomorrow. Take a Carnival cruise this year, or take time off several years from now. Those are the choices you have to make. Building a nest egg isn't a decision of whether to consume, but when to consume. Do it now, and you won't be able to do it later without having to work for a paycheck.

3. Having no clue about how much to save. According to the 2007 Retirement Confidence Survey from the Employee Benefits Research Institute, only 43% of workers have calculated how much they need to retire. But you can't get to where you want to go if you don't know how to get there. You need a plan. (A free 30-day trial to my Motley Fool Rule Your Retirement service is a good place to start.)

4. Spending your retirement savings too fast. If you've made it to retirement, congrats! You've amassed enough money to create your own portfolio-generated paycheck. Excellent work.

But you can't take it too easy, because you'll receive a severe pay cut if you deplete your portfolio too fast. How much can you take out each year and be almost certain that you won't outlive your savings?

Just 4% a year. That's the withdrawal rate that would have sustained a mix of stocks and bonds over most 30-year historical periods. Sure, if you retire on the eve of the next bull market, you can take out more. However, if you quit working right before the next bear market, then taking out more than 4% a year could have your portfolio beating you to the grave.

5. Not giving a hoot about asset allocation. And speaking of mixing stocks and bonds, nothing can wound a retirement like bad investment decisions, whether it's owning too much of one stock, letting emotions take over, chasing the latest fad, or letting short-term events affect your long-term strategy.

You basically have two choices: You can be a master stock-picker like Warren Buffett or Peter Lynch and try to find the next Wal-Mart, or decide whether a 5% dividend yield makes Altria (NYSE: MO  ) a good stock. Or you can broadly diversify your assets, mostly via low-cost index funds such as Vanguard Total Stock Market (AMEX: VTI  ) .

This way, you enjoy exposure to giants like Coca-Cola (NYSE: KO  ) and ExxonMobil (NYSE: XOM  ) -- both top 25 holdings in the ETF -- and smaller growth companies such as Monster (Nasdaq: MNST  ) and Affymetrix (Nasdaq: AFFX  ) . But until you've established your skill at finding great investments, keep the bulk of your assets in a broadly diversified, regularly rebalanced portfolio.

6. Letting Uncle Sam eat your retirement. There are many types of investments and investment accounts, and they all have their own quirks when it comes to taxes. Not knowing all the rules can lead to too much taxation -- and less money for retirement.

For example, profits from stocks that are held for at least a year will be taxed as long-term capital gains -- a rate no higher than 15%. Interest from corporate bonds, on the other hand, is taxed as ordinary income -- a rate as high as 35%. Yet many investors keep their stock investments in their tax-advantaged accounts and their bonds in regular, taxable accounts. That just doesn't make sense. Asset location can be just as important as asset allocation.

7. Depositing your retirement in your fatty deposits. As Americans' savings rate has dropped, our obesity rate has risen. Just a coincidence? All I can say is, the more we stuff our faces, the less we can stuff our IRAs. So before you make your next visit to the Olive Garden, find out how much you need to save every month to retire when you want, how you want. Then make sure that amount gets deposited in your retirement accounts. If you get that far, then visit the Olive Garden as a reward. You deserve it. 

8. Paying too much for help. There's nothing wrong with getting financial advice. If we Fools didn't think investors could use ideas, feedback, and answers, we wouldn't be here.

But we firmly, strongly, passionately believe that such help should be objective and affordable.

Paying too much for advice (especially if it's bad or at least conflicted) does a lot for your broker's retirement, not yours. Paying just 1% a year on a $100,000 portfolio over 20 years could result in your forking over more than that amount in fees. That's a hundred grand that could have been in your pocket. Of course, if the advice you received had your portfolio performing better than what you could do on your own, then the price might be worth it. But if you're paying 1% or 2% a year to lose to an index fund -- as most mutual fund managers do -- then you're better off taking control of your own investments. 

9. Retiring permanently when you really just needed a break. If you're in your 60s, you should plan on living at least another two decades. Can you stand full-time leisure for 20 years? Sure, it may sound good now, but many retirees find they get pretty bored after a while. But by then, they have already severed many of their professional ties. Before you decide to retire fully and permanently, discuss a phased or gradual retirement with your employer and/or business partners. Or the possibility of working on a project basis, allowing you to take several months off each year. Or maybe just a one-year sabbatical. Explore your options before you no longer have them.

Looking for details on any of these topics, whether it's asset allocation, keeping the most money for yourself (and not Uncle Sam), and safe withdrawal rates? Check out my Rule Your Retirement service, completely free of charge for one month. Click here to learn more.

This article was originally published on Aug. 18, 2005. It has been updated.

Robert Brokamp does not own any companies mentioned in this article, though he has made regular contributions to his fatty deposits. Coach is a Motley Fool Stock Advisor recommendation. Wal-Mart and Coca-Cola are Inside Value picks. Affymetrix is a Rule Breakers choice. The Motley Fool is investors writing for investors.


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