Ideally, retirement is a time to pursue life on your own terms and agenda. However, financial advisers say that workers are often their own worst enemy when it comes to getting the retirement lifestyle they want.
What are the biggest retirement-planning blunders these advisers witness? Here are five of the most common -- and costly.
1. Waiting to begin saving
"People don't plan far enough ahead," says Nicholas Reister, an attorney and counselor who specializes in business and estate planning at Smith Haughey Rice & Roegge in Grand Rapids, Michigan. "They start to think about retirement when they are maybe in their 50s."
Reister says people who don't plan ahead are often forced into less-than-ideal situations. In addition to working longer, they may end up having to sell assets to make ends meet. Rather than waiting to maximize the profits from those sales, individuals desperate for money may unload assets in a down market and potentially lose out on a significant amount of cash in the long run.
"Start in your late 20s or early 30s when it comes to investing and saving money," Reister advises.
2. Missing out on tax incentives
Those who are already in their 50s and haven't done much in the way of saving can make additional catch-up contributions to their IRA or 401(k). But Reister says that overlooking these tax-sheltered savings options is another common mistake individuals make.
"People don't maximize the optimal savings investments available," he explains.
That means not taking full advantage of a 401(k) match offered by an employer or the tax benefits available through IRAs.
If the available savings options seem confusing, Reister says it may be time to call in the pros.
"Build a team of advisers to help with your finances and taxes," he says.
3. Keeping all their eggs in one basket
Isaiah Goodman, a financial representative with Northwestern Mutual, says he commonly sees individuals too heavily invested in a single company.
"I have seen far too many clients with 50, 60, 70 and up to 90 percent of their 401(k) and total investments totally based on their employer," he says.
That's a recipe for disaster, Goodman says.
"Even if the company doesn't totally disappear like an Enron, at the 90 percent mark, a value drop of 5 percent on a $1 million portfolio is $45,000. For some people, that's an entire year of retirement."
Reister says that workers can protect themselves by investing their money in a variety of funds and asset types.
"Diversify for security issues as well as for flexibility," he says.
4. Living too large in retirement
While retirement is a time to enjoy life, some individuals make the mistake of living a little too large and bringing themselves to the brink of financial ruin.
Steven Elwell, CFP, vice president of Schroeder, Braxton & Vogt in Amherst, New York, relates how one couple in their 60s decided to splurge on a big house using a loan from their 403(b) retirement fund.
"All sorts of problems ensued after the house purchase -- the large mortgage payment ate up all their cash flow and caused them to go into credit card debt. The working spouse was then laid off, causing the 403(b) loan to become immediately taxable. Then they needed to take funds from their IRA just to pay the tax bill from the loan default, essentially causing taxes on withdrawals needed to pay taxes."
Eventually, the couple agreed to sell the house, but by then the damage was done and their standard of living was likely reduced for the remainder of their retirement, Elwell says.
"The clear lesson here is to make sure you can afford something, especially something as big as a house, before you buy it," says Elwell. "The mortgage payment was barely affordable while the one spouse was working and the couple did not consider how they would pay for the mortgage if they were both retired."
To avoid making the same mistake, Elwell recommends individuals have a detailed budget in place and estimate how much income they will realistically have in retirement before making major purchases later in life.
5. Making costly divorce mistakes
Finally, some mistakes made early in life can come back to haunt you at retirement time. For example, Goodman shares this cautionary tale regarding an individual who divorced from his wife while in his 30s.
"As a part of the divorce his wife took the 401(k), and he took the house," explains Goodman. "At the time they were about the same value ($350,000) so he didn't think much about it."
That may have been a $1 million mistake.
"The 401(k), even at 5 percent growth without new investments, will turn into $1.5 million," says Goodman. "The home will not likely cross the $500,000 mark in value and equity."
The bottom line for anyone experiencing a divorce is to consider future value in addition to current value when divvying up assets.
Other expensive errors
While these are five of the biggest blunders, they certainly aren't the only ones. Failing to take required minimum distributions from IRAs and 401(k)s, supporting adult children or grandchildren indefinitely and running a small business without an exit strategy are all ways to lose money rapidly in retirement.
But most financial advisers agree that a little planning and research can go a long way toward having the retirement of your dreams. As Elwell sums it up, "The old saying remains true as ever: Failing to plan is a plan to fail."
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