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5 Common Retirement Mistakes: How Many Have You Made?


People make many mistakes when it comes to saving and preparing for retirement. You can probably name some of the biggies, like not taking advantage of employer-provided retirement accounts. Here are a few more from Scott Holsopple, managing director of retirement solutions at the Mutual Fund Store.

No plan
One of the biggest mistakes people make is not having a retirement plan at all. Holsopple offered a road trip analogy, noting that you'll most likely have a plan before you set out on a trip, knowing which roads you plan to take and what milestones to look for. You might have to make course corrections along the way, but that will be easier if you have done some planning. It's similar with retirement planning: We're not likely to meet our financial goals unless we've taken time to estimate what they actually are and how we'll get there. We need to know, for example, how big a nest egg we want to retire with, how much to sock away in our retirement accounts, and how rapidly we might expect our money to grow.

Underappreciating retirement accounts
Another mistake many make is not realizing how vital their retirement accounts will be. IRAs and 401(k)s, for example, tend to be major sources of retirement income, so it's important to establish retirement accounts and regularly contribute to them. IRAs often offer the most flexibility in terms of investment options, but employer-based plans such as 401(k)s often offer matching funds from your employer. That's free money, so it's smart to meet the full match.

Holsopple noted that the vast majority of folks with retirement plans are not very engaged with them -- for example, they have not initiated a trade in their account in the past year. That may be a sign of disengagement, but it's not necessarily a bad sign. After all, many investors do well by trading infrequently. If your portfolio is full of stocks you bought to hold for many years, then leaving it untouched for a year is not a bad thing at all. But you do need to keep up with your holdings from time to time to make sure they're still on track and that your portfolio's assets are still allocated as you want them. Not keeping up with your portfolio's holdings or its performance is a dangerous kind of disengagement.

The wrong numbers
Another error is fixating on the wrong numbers. For example, many people aim to contribute enough to their employer-based retirement account that they can collect the maximum matching contribution. That's smart, because your employer is offering you free money with the match. But think beyond the sum needed to maximize the match, because the more you can save and invest effectively, the sooner you might retire, and the more comfortable your retirement might be. Another number people fixate on is the rule-of-thumb retirement contribution of 10% of your income. But 10% may not get you where you need to go, especially if you're starting a little late. For many of us, 12%, 15%, or more would be far more effective. If that seems too ambitious and unfeasible, Holsopple recommends increasing your annual contributions by 1 percentage point per year. So go from, say, 8% to 9% this year and 9% to 10% next year, and keep those increases up for a while. If you're daunted, figure out how much the increase represents each week, and it will seem more doable. A 1% increase for someone earning $50,000 per year is just $500 annually, or about $10 weekly. Easy, right?

Poor 401(k) management
Finally, a critical error too many people make is cashing out their 401(k) accounts when changing jobs. Sure, you collect a small or large sum of money, and it's a welcome windfall, but you're also shortchanging your future. Holsopple suggests that if your balance is $10,000 or less, you should take your old 401(k) with you to your new employer. If it's more than $10,000, you might open an IRA with it, which will let you invest in a wider range of mutual funds and gobs of individual stocks.

All of these moves can be easier said than done. Don't balk at the thought of asking -- or paying -- for help. Even a $500 fee can be worth it, if it saves you many thousands of dollars. You can tap a lot of guidance for free, though, in books and on the Web.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Read/Post Comments (3) | Recommend This Article (7)

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 June 23, 2014, at 12:52 PM, Schneidku40 wrote:

    Can you roll over a 401(k) into a Roth IRA if your balance is above the limit for Roth yearly contribution or do you have to put it into a traditional IRA?

  • Report this Comment On June 23, 2014, at 3:39 PM, ArchStanton6 wrote:

    ^^^ I believe you have to roll it into a regular IRA and then do a conversion to a Roth. That was how I did mine anyway. The value can be anything, you'll just have to be prepared to pay tax on it.

  • Report this Comment On June 24, 2014, at 1:41 PM, SRHCAPS wrote:

    If you are currently investing into a Roth 401(k) you can roll directly into a Roth IRA regardless of account value.

    If you are investing in a traditional 401(k), you'll first need to roll into a traditional IRA and then convert it into a Roth IRA.

    Note: the conversion to a Roth IRA is a taxable event so you will need to account for that expense. Generally, we recommend that you pay this with savings that is outside of an IRA. If you withdraw from the IRA to pay the taxes you'll be charged a 10% penalty.

    For more information on the conversion process check out this article -

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Selena Maranjian

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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