7 Ways to Ruin Your Retirement

If you've been socking away a little money every few months for your retirement and you know you've got Social Security benefits coming to you, too, you might think you're all set. Your financial future may actually be in grave danger, though, if you're making some common money mistakes. Here's a look at seven ways you might be ruining your retirement.

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1. Carry a lot of debt

If you're approaching retirement with significant debt, or even if you're decades away from it but owe tens of thousands of dollars, you're facing some major financial headwinds. It's hard to get ahead if you're just trying not to fall further behind. You might have some investments earning, say, an annual average of 8% in the stock market, while paying 25% annually on your credit card debt. Low-interest-rate debt such as that from most mortgages isn't usually problematic -- but you should aim to pay it off before hitting retirement, when your income will likely be lower. Credit card debt, though, should be paid off as quickly as possible -- even if you need to take on a part-time job on the side for a while. Other effective tactics include calling your creditors to negotiate a lower interest rate or transferring your balance to a new card that will charge little or nothing for a limited initial period, during which you work hard to pay the debt down. Carrying a debt balance of $20,000, as many people do, and being charged 25% annually on it, will cost you a whopping $2,500 each year.

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2. Fail to save enough

Another way to make a retirement very challenging is to not have saved enough. Sure, you might read that it's good to sock away 10% of your income. But if you don't earn that much or you're not that far away from retirement or you need your nest egg to generate a lot of income in the future, you'll probably need to be saving more than 10%. Check out the table below to see how much more powerful larger annual savings amounts can be.

Calculations by author.

3. Fail to invest effectively

You might be saving large sums each year, but if you're not deploying them effectively, they can underperform and underserve you. Government bonds, for example, might be appealing because they're so safe, but right now they're sporting puny yields -- around 2.5% for 10-year bonds and 3.1% for 30-year ones. The table below shows what a difference your money's growth rate can make, reflecting what annual investments of $10,000 can grow to:

Calculations by author.

For long-term money, it's hard to beat the stock market, which you can invest in easily with an index fund such as the SPDR S&P 500 ETF (SPY 0.75%). If you're good at studying and choosing individual stocks, give extra attention to dividend payers, as that income can be welcome in retirement. A $200,000 portfolio in dividend stocks with an overall average yield of 4% will kick out $8,000 in annual income. 

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4. Don't take advantage of tax-preferred retirement accounts

You can boost your investments' performance by making the most of retirement accounts such as IRAs and 401(k)s. The traditional forms of both will give you upfront tax breaks, resulting in more money that you can invest -- while the Roth versions promise tax-free withdrawals if you follow the rules. Learn more about these options so that you can make good decisions regarding them. For example, be sure to contribute at least enough to your 401(k) to receive all the matching money from your employer that you can. It's free money, after all. Next, think about your current income tax bracket and your expected one in retirement. If you're paying steep taxes now and expect to face a much lower rate when retired, then contributing to a traditional IRA or 401(k) can shrink your taxable income by the amount of your contributions, with Uncle Sam only taxing your future withdrawals. On the other hand, Roth IRAs and Roth 401(k)s (yes, those exist) let you accumulate significant sums and eventually withdraw them tax-free. Using the examples above, if you sock away about $10,000 annually for 20 years and it grows at 8%, becoming almost $500,000, that can all be tax-free assets for you. If it were taxed at 20%, it would cost you $100,000.

5. Fail to factor in healthcare expenses

It's a mistake to ignore the substantial cost of healthcare in retirement. According to Fidelity Investments, a 65-year-old couple retiring today will spend, on average, a total of $260,000 out of pocket on healthcare. (That's an average, of course -- meaning you might spend less, or more.) One way to save money on healthcare expenses now and in the future is to use a Health Savings Account (HSA). If you have a qualifying high-deductible health insurance plan, you can fund an HSA with pre-tax money, lowering your tax bill just as you would with a contribution to a traditional IRA or 401(k). That money can then be used tax-free for qualifying healthcare expenses. Better still, the money in the account can accumulate over years, invested and growing, and once you turn 65, you can withdraw funds from it for any purpose, paying ordinary income tax rates on withdrawals. Thus, an HSA is actually a bit of a healthcare-expense/retirement hybrid. 

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6. Withdraw money early from retirement accounts

Another financially ruinous move is cashing out a workplace retirement plan when you change jobs. It can be tempting, especially when you're young and you only have, say, $10,000 or $20,000 in the fund. But according to a 2014 Fidelity Investments report, about a third of workers cash out some or all of their 401(k), and: "Hypothetically, a participant at age 30 who cashes out a $16,000 balance today could lose up to $471 per month in retirement income cash flow (assuming he or she retires at 67 and lives through 93)." Instead of cashing out, keep that money saved and growing. You may be able to roll the funds over into an IRA or into your next employer's retirement plan. Withdrawing the money can deliver a hefty early withdrawal penalty, too.

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7. Assume Social Security will be enough

Many people assume that Social Security will provide enough income on which to live in retirement, if they tighten their belts enough. Learn the facts before making any such assumptions, though. The average Social Security retirement benefit was recently $1,360 per month, or about $16,000 per year, with the maximum benefit for those retiring at their full retirement age recently at $2,639 per month -- or about $32,000 annually. If that seems like it won't be enough, start devising a plan for how you will generate more income in retirement -- such as via dividend-paying stocks or annuities or other means.

There are lots of ways to wreck a retirement -- but lots of ways to build or rebuild one, too. The earlier you start thinking about your future and making specific plans for it, the better. After all, your earliest saved dollars are your most powerful.