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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 recent study by Hewitt Associates found that 46% 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 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 gadget now, or buy time in retirement tomorrow. Take a 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 2010 Retirement Confidence Survey from the Employee Benefits Research Institute, 56% of workers have not 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. (If you need a little professional, objective help determining whether you'll have enough to retire, check out the fee-only financial planners of the Garrett Planning Network, who are now offering a limited-time 10% discount to Motley Fool readers. Just click on your state on the Locate an Advisor map, and look for the Fool logo for participating advisors.)

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.

Here's how asset allocation can pay off. By now, you know that the S&P 500 lost money over the past decade -- in fact, the performance from 2000 to 2009 is the worst 10-year period for U.S. large-cap stocks, starting in 1926, according to Ibbotson Associates -- and that includes the Great Depression. But if you built a moderate-risk portfolio of 75% stocks and 25% bonds out of the following asset classes, you would have made about 65% over the past decade.

Asset Class

Representative Fund

Typical Holding

U.S. large-cap stocks

Vanguard 500 Index (VFINX)

Microsoft

U.S. small-cap stocks

Vanguard Small Cap Index (NAESX)

Green Mountain Coffee Roasters

U.S. micro-cap stocks

Bridgeway Ultra Small Company (BRSIX)

Buffalo Wild Wings

Developed-market foreign stocks

Fidelity Spartan International Index (FSIIX)

Total

Emerging-market foreign stocks

Vanguard Emerging Markets Stock Index (VEIEX)

Teva Pharmaceutical

Real estate investment trusts

Vanguard REIT Index (VGSIX)

Host Hotels & Resorts

Bonds

Vanguard Total Bond Market Index (VBMFX)

U.S. Treasuries

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 -- not to mention what other services the advisor provided -- then the price is 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? Contact the fee-only financial planners of the Garrett Planning Network, who charge by the hour or the project, so you get just the advice you need, with no conflict of interest. Click on your state on the Locate an Advisor map, and look for the Fool logo for advisors who are offering a 10% discount.

Robert Brokamp is a Certified Financial Planner and the senior advisor of Rule Your Retirement, which is available with a 30-day trial at the low, low price of free. He doesn't own shares of any of the stocks mentioned in this article. Green Mountain Coffee Roasters is a Motley Fool Rule Breakers recommendation. Buffalo Wild Wings is a Motley Fool Hidden Gems pick. Total is an Income Investor recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft, which is an Inside Value selection. The Fool has a disclosure policy.


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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 April 11, 2010, at 2:20 AM, dgmennie wrote:

    Apparently Robert Brokamp still hangs out with the tooth fairy. Here are his "nine points" viewed from the perspective of reality:

    1. Cracking your nest egg before retirement. - NOBODY gets a steady and constantly-increasing paycheck for 40+ years without facing unemployment, medical emergencies, or personal problems such as divorce.

    2. Spending your retirement money way too early. - See response to #1.

    3. Having no clue about how much to save. - More likely: Having no cash to save in addition to the money you MUST SPEND every year just to survive.

    4. Spending your retirement savings too fast. - More likely: NOBODY can predict the future, yet most all "retirement investing" scenarios foolishly assume that you can.

    5. Not giving a hoot about asset allocation. - Every "expert" has a different take on this, yet the key factors are HAVING ASSETS to begin with, then PREDICTING THE FUTURE as to where they should be invested. You guess wrong, you loose.

    6. Letting Uncle Sam eat your retirement. - If taxes don't get you, then inflation will. Uncle is holding all the cards on this one....unless perhaps you have a PHd in currency speculation?

    7. Depositing your retirement in your fatty deposits. - NOBODY is going to avoid eating out once in awhile with the goal of a big retirement purse. Why not give up your car and ride the bus? Better yet, live in a van down by the river and don't take on a mortgage (your family will love this).

    8. Paying too much for help. - Paying ANYTHING for "advice" is probably a waste of both your money and your time. A decade ago, conservative investors were told to stuff ENRON into their portfolios by the "advisor" class. Need I say more?

    9. Retiring permanently when you really just needed a break. - FEW IF ANY EMPLOYERS give a hoot about helping individual employees ease into retirement. It may not be a good idea to mention anything about leaving your job until YOU are ready to clean out your desk. Your employer may well prefer an agreesive young temp to take up any slack rather than an older worker easing his/her way to pasture. THINK ABOUT THIS CAREFULLY. As in any game, signaling your intentions early is a losing strategy.

    Now, do my comments make sense, or do you still prefer the tooth fairy?

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