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How to Avoid 6 Common Retirement Planning Pitfalls

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BNWX20 Pennies in a cracked egg shell. Image shot 2010. Exact date unknown. Retirement nest egg negative retirement funds money
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By Rebecca Reisner

So you say you're already contributing to a 401(k) or some other type of retirement account? Congratulations -- you're working on making your future self very happy. That's because the secret to retirement savings is that you can't make up for lost time.

And if you're making progress, you want to make sure that you're doing retirement right ... right? Knowing just how much to save is one of the hardest financial challenges there is. You might try a calculator, or talk to a financial planner to figure out your big picture.

In the meantime, you should avoid missteps that might crack your nest egg. That's why we asked several certified financial planners to pinpoint common pitfalls they -- and how you might avoid them.

1. Having No Clue How Much You Need to Save for Retirement

More than half of Americans haven't calculated how much they'll need to save for retirement, according to the 2014 Retirement Confidence Survey conducted by the Employee Benefit Research Institute. But in much the same way you should have a figure in mind when you're saving for a car or house, knowing your long-term retirement goal can help you figure out a savings plan to reach it.

Seeing such a large number may feel overwhelming, but it could also light a fire under you too. "If you see you need $2 million for retirement, that could jump-start savings," says Kevin O'Reilly, principal of Foothills Financial Planning in Phoenix. Just remember that you do have compound growth to help you build your investment -- and the younger you are, the more time is on your side.

An online retirement calculator can help give you an idea of the amount you may need in retirement, based on factors like how much you have saved so far and various estimated expenses. Just be honest and meticulous when entering the information, or else it's "garbage in, garbage out," cautions Erika Safran, founder of Safran Wealth Advisors in New York.

Many retirement calculators use a replacement ratio when doing their calculations, which is simply the percentage of your current income that you think you'll need to have for retirement. An 85 percent replacement ratio is a good rule of thumb.

2. Having No Clue How Much You Might Spend in Retirement

Do you keep a budget? If you don't know where your money goes today, you may be more clueless about where it could go in the future. "I think it's a good idea even prior to retirement to keep a log of spending," O'Reilly says. "I get people who have no idea what they're spending on daily expenses."

The LearnVest Money Center can help you keep tabs on your spending because it records and categorizes your daily financial transactions. If you'd prefer to use old pen and paper, write down every regular expenditure you have, including dining, groceries, utilities, clothing, car maintenance and fuel, entertainment, your children's needs, medical bills, travel and your mortgage. The more you can track, the better.

Then go through that list and try to predict which of those costs might increase and decrease in retirement. For example, you may have your mortgage paid off by the time you retire, and smaller costs, like regular dry cleaning for work attire, could shrink significantly. On the flip side, maybe you'll travel more after you're done working, or spend more time on the golf course. The sum of these costs can help give you an idea of how much you'll be spending in the future.

Don't forget to factor in inflation, and consider some real-time experimentation. "I've seen people test-drive their [projected retirement] budget for a while before retirement, to make sure it's realistic," says Joseph Hearn, vice president of Teckmeyer Financial Services in Omaha and author of the Intentional Retirement blog.

3. Underestimating the Cost of Health Care

Only 36 percent of Americans have thought about how much they'll need for health-related expenses in retirement, according to AARP's 2013 Health Care Costs Survey. And why should they worry -- won't Medicare take care of those bills once they turn 65?

Not so fast. Research by Fidelity shows that a 65-year-old couple retiring in 2013 will need approximately $220,000 to cover medical bills throughout their retirement -- beyond whatever Medicare pays for. Most dental care costs and eye examinations, for example, are not covered by Medicare. And most importantly, the government won't foot the bill for long-term care -- and the median annual cost of a private nursing home room is nearly $84,000.

AARP's health care costs calculator lets you plug in data such as your age, weight and information about health issues, and estimates out-of-pocket expenses you'll incur after you retire.

4. Responding Rashly to Market Volatility

When the economic weather grows stormy, it may seem natural to distrust the markets and dash to the nearest safe money harbor. "The mistake people make is to convert [some of their 401(k) holdings] to cash" during a crisis, says Safran. "But cash doesn't provide any growth."

O'Reilly recalls a client who insisted on sitting on a fortune in cash because of the 2008 crash but missed out on the resurgence that followed. "That particular decision has probably cost him several hundred thousand dollars," he says. "Many people sold their stock after the crash and guaranteed losses by never getting back in the market to enjoy the gains. They bought high and sold low."

5. Not Being Truly Diversified

One of the best protections against market volatility is diversification. The three basic asset classes within a retirement portfolio are stocks, bonds and cash. But more diversity is often better.

You may have stocks spanning a variety of sectors -- technology, health care and financial services, for instance -- but if all those are U.S.-based stocks, you're not as diversified as you think. If you're not sure how to allocate your portfolio, talking to a financial planner can help. For an example of asset allocation, see this sample portfolio from LearnVest's Start Investing bootcamp.

6. Ignoring Fees

The financial institutions that handle 401(k)s for employers often charge a fee, sometimes called an expense ratio, to cover such things as administrative costs, customer service and online transactions. Some take a flat fee, while others take a percentage of a given account. Either way, how much the fee adds up to -- as well as its very existence -- often puzzles retirement savers. "Finding out what the fee is can be hard to tackle," O'Reilly says.

The fee's consequences, however, can have a monumental effect on your earnings. According to Department of Labor calculations, a 1 percent hike in a 401(k) fee can, over a 35-year period, reduce your account balance by 28 percent.

A general rule is to look for low-cost index funds in a retirement account, because these fees typically fall between 0.1 percent and 0.2 percent. O'Reilly believes that a fee of up to 0.5 percent is reasonable. You may have to dig for the fine print to figure out what you're paying.

And if you're not afraid to rock the boat a little, you can try broader action to make sure you're not being gouged by these administrative costs. "Employees who don't like the 401(k) fees they see can mention it to their employer and see if [the company] wants to change the plan," Hearn says.


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bobktmfs

It takes a lot to prepare for marriage. But you get those first steps going at http://www.mutualfundstore.com/retirement-planning. The sooner you get started, the better off you will be. Especially since only you can plan for retirement. No one else can prepare for your retirement.

May 15 2014 at 12:53 AM Report abuse rate up rate down Reply
j79xjames

The biggest mistakes you can make is to not start planing and saving/investing in your 20s and doing it with every paycheck you get until you retire.The power of compounding is lost on many people. I also use several sites for retirement information including the site Retirement And Good Living which provides information on finances, health, retirement locations, part time jobs, travel and more.

May 09 2014 at 7:18 AM Report abuse rate up rate down Reply
cyzomaca

The best advice for building retirement that I was ever given are:
1) Don't spend more than you make. You should try very hard to only borrow money for a Car and a home. Everything else should be paid off monthly.
2) Retirement is not a matter of Age. It is a matter of lifestyle. If you don't mind living on the street you can retire at any age. Plan your retirement based on the lifestyle you want to maintain.
3) If you can accomplish #1, then you will be able to save some money each year. l did not start seriously saving until I was in my 40's. Why? Children. As long as they are home, they will consume every extra nickel you can lay your hands on. Try to start as soon as possible.
4) When you buy your home, buy the worst property in the best neighborhood that you can afford. And be willing to sell within 5-7 years if possible. (This also applies to your job. Most people get their biggest raises when they change jobs; about every 3-5 years).
5) Most people’s biggest expense is driving. You can cut that expense in half by being smart. Get a used car (i.e. Honda Civic), get an affordable insurance policy (you can find $25/month rates from Insurance Panda), and take advantage of apps like Waze and GasBuddy to cut back on gas. Anybody can drive on less than $50/month if they do it right.
6) When you can save, your target should be 50%. Don't expect to ever achieve that, but try. The average person cannot save over 10% of their income. The ones that can are much better prepared for retirement. This should be possible. Your maximum pay (value) will occur between the ages of 35 - 55. Every time you get a raise, increase your savings and don't change your lifestyle.
7) When you invest, try to get a guaranteed return of about 20% on your money. You will not find this very easily, but it's possible. The most profitable is Income Property, Small Business Partnership and others. Run the numbers to ensure that if you invest $500, you get at least $100 back each year after expenses. Sounds difficult. And it is. But, it can be done.
8) Don't loan or borrow money without a Contract. You can draw this up yourself. And don't loan or borrow money from relatives. (At least not until you are able to lend).
There is plenty of other good advice, but it's like dieting. It's a lifestyle change that involves years of diligent management.
Good luck!

May 08 2014 at 3:39 PM Report abuse rate up rate down Reply
Sev Meneshian

Even though companies are required to disclose fees, many savers just get intimidated by the thought of looking through a plan prospectus. As a result, most savers don't know what their 'all-in' fees are. Some plan providers even claim they don't charge administration fees, but then offer index funds that cost over 1%. It's common for a saver to pay well over 1% for their retirement plan. publicretirementplanners.blogspot.com

May 08 2014 at 2:05 PM Report abuse rate up rate down Reply