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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 become a reality.

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 leaving 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 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) are really 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 of 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 Philadelphia Consolidated (Nasdaq: PHLY  ) , or decide whether a 8.3% dividend yield makes Altria (NYSE: MO  ) a good stock. Or you can broadly diversify your assets, mostly via low-cost index funds such as the Vanguard 500 Index Fund (VFINX).

This way, you enjoy exposure to giants like ExxonMobil (NYSE: XOM  ) and Microsoft (Nasdaq: MSFT  ) -- both stocks are among the fund's top 10 holdings -- and smaller growth companies such as Watson Pharmaceuticals (Nasdaq: WPI  ) and Bemis Co. (NYSE: BMS  ) . 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), or safe withdrawal rates? Check out my Rule Your Retirement service, completely free of charge for 30 days. Click here to learn more.

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

Robert Brokamp does not own any of the companies mentioned in this article, though he has made regular contributions to his fatty deposits. Bemis is a Motley Fool Income Investor recommendation. Microsoft is an Inside Value choice. Coach is a Stock Advisor pick. The Motley Fool is investors writing for investors.


Read/Post Comments (4) | Recommend This Article (34)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 26, 2013, at 3:34 AM, wkb2texans wrote:

    I was laid off by company - they cut all 20 overhead employees on the same day - and decided that I would take a break before looking for another job. At age 60, I soon found that no one wanted an old man as an employee.

    Regardless of my Masters, PMP certification, and 30 years of project, operations and program management experience, I received ZERO phone calls, despite sending out more than 400 applications! I've had my resume done professionally, and then done again when I didn't get any responses from the 'new and improved" version. I bought new suits so that my clothing would be more stylish and not have quite the "worn look" .... nothing. So, after 6 months with a head hunter resulted in ZERO job offers (and only one phone interview), I decided that I would just "hang it up."

    As a former Air Force officer, my retirement pay is about $87K a year and I have rental properties that bring in around $20K more and my wife works part time, but in a church environment, making only $10K a year. I owe nothing except for the house we live in ($365K) and my rental property is debt free and has been evaluated at $180K. My monthly bills run around $3,600. So, while we can't live as the Royal Family, we can live very comfortably on what we're bringing in. We have around $200K in investments (traditional and Roth IRAs.)

    Problem? I don't want to sit on my butt for the next 20 years. I want to go back to work. I've also found that if we want to be able to give to others like we would like to, then we need to have more coming in monthly. So, anyone have any suggestions to a guy who has proven himself in job after job and has been successful in all professional endeavors, but can now not find work?

    I'm a first timer here, and I've probably violated all stated rules about where I can post and what I can say or ask, but this is what I have for now.

  • Report this Comment On November 08, 2013, at 5:22 PM, llpalma wrote:

    Hi wkb2texans:

    Have you considered the non-profit world? The organizations run the gamut of interests and the workers are typically committed to the mission. Many non-profits could certainly use your skills and you would receive a sense of accomplishment and possibly new adventures. Non-profit, church, or volunteer work in other countries could lead to a later career in a country that values experience. The Peace Corps offers assignments to married couples and provides valuable non-monetary benefits. There is so much to do apart from sitting on the old butt. "Think different" and good luck in your adventures.

  • Report this Comment On March 16, 2014, at 7:04 PM, bbuppha wrote:

    Hi wkb2texans

    Do you get a job yet? I am helping high school children to get $$ for college,if you like just let me know.bbuppha@yahoo.com

  • Report this Comment On August 20, 2014, at 3:23 PM, ybckorea wrote:

    wkb2texans,

    Well, in 5 more days it will be one year since you asked the question. By now if you have not found a job, you have found that things can keep you busy. You may or may not have tried consulting. It is the most common form of extending your employment. If you have not tried it, got on LinkedIn. Get together with past buddies and you will open up a wide field. They will love to tell you how they did it.

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