By Andrew Housser
For today's retirees, the "golden years" may be losing their luster. The average baby boomer (the 28 million Americans born between 1945 and 1964) is a half-million dollars short on individual retirement savings. As a result, more than half will need to work seven years or longer after they turn 65.
Depending on your age, retirement may seem far off and of little current consequence. Or it may be right around the corner. Regardless of how many years you have left to plan, it is important to take steps to ensure a comfortable future. Improve your odds by avoiding these common and potentially costly investing mistakes.
Mistake No. 1: Playing It Too Safe. Investors have been understandably wary of aggressive investments since the market crashed in 2008. But investing too conservatively can be a risk, too. This is especially true considering the risk of inflation. Playing it too safe by relying on bank certificates of deposit (CDs) or money market accounts can lock money into very low-interest situations. The worry: the value may not keep up with taxes and inflation. Stocks, equity mutual funds and exchange-traded funds are riskier; however, the payoff can be greater. The key is to carefully choose and watch these investments. Balance the risk with safer investments as you get closer to retirement.
Mistake No. 2: Failing to Diversify. Your portfolio should be a mix of asset types. These include domestic and international stocks; large-cap growth, value, small-cap and emerging market stocks; bonds and other fixed-income securities; and cash investments like money-market funds. The mixture reduces the risk of any one asset dragging down the total investment. Financial planners and advisors, and a plethora of online and offline experts and materials, can offer input on specific ways to allocate that apply to your individual situation.
Mistake No. 3: Not Seeing the Big Tax Picture. Remember, taxes come due when you withdraw funds from certain tax-deductible, tax-deferred retirement plans. These include 401(k)s, pensions and traditional Individual Retirement Accounts (IRAs). Roth IRAs allow investors to pay taxes up-front, so withdrawals are tax-free. Make sure you are taking advantage of available tax breaks. Up to 20 percent of workers do not enroll in their employer's retirement plan. If your employer matches a portion of your contributions, not participating is like giving up free money.
Mistake No. 4: Forgetting about Fees. Americans lose tens of thousands of retirement dollars by paying unnecessary fees. Retirement plan fees can run as much as 4 percent annually. Seek out a plan that charges about 1.5 percent, including mutual fund fees (also known as the expense ratio). If fees for the plan offered by your employer seem extremely high, consider contributing enough to obtain the maximum employer match. Then save additional for your retirement in other savings vehicles of your choosing that carry lower fees.
Mistake No. 5: Minimizing Contributions. The average worker with a retirement plan saves 6 percent of his or her annual salary in that plan. A 50 percent employer match would boost that retirement savings to 9 percent. The average individual would likely need to consistently save that 9 percent starting at age 22 to retire by age 65. Even then, it might not be enough. Saving even a little is better than not saving at all, but any time you can increase your savings, it will be a great help later on.
Mistake No. 6: Not Balancing Debt Payoff and Savings. Some people focus exclusively on debt repayment, or exclusively on retirement savings. The best plan is a plan that prioritizes both: pay down debt while saving some money for retirement. Put away the plastic away so you don't accrue more debt while you're trying to pay existing off.
Before you hang up your work hat, make sure you have the savings you need, with a reliable plan in place. In general, it's best to start by making withdrawals from taxable accounts like mutual funds and savings accounts. Then switch to tax-deferred accounts like IRAs and 401(k)s. Final withdrawals should be from nontaxable accounts like Roth IRAs.
Keep in mind that the financial challenges faced by Social Security, Medicare and Medicaid make it more likely that future retirees will experience a combination of higher taxes, reduced benefits and an increase in age eligibility. Many experts believe it best to defer taking Social Security benefits for as long as possible.
Keep in mind that the financial challenges faced by Social Security, Medicare and Medicaid make it more likely that future retirees will experience a combination of higher taxes, reduced benefits and an increase in age eligibility. Despite this, many experts recommend deferring Social Security benefits for as long as possible (up until age 70). That is because benefit payments go up 8 percent every year, once you are eligible, that you delay collecting payments (up until you turn 70 – at which point the 8 percent increase stops).
No matter your age or income, it is always a good idea to talk to a financial advisor. He or she can ensure you are on the right financial track so that you can comfortably enjoy those golden years.
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.