How to Avoid Disastrous Retirement Mistakes

When you envision your retirement years, you probably picture yourself enjoying time with your family without the backbreaking daily commute to your workplace. However, you may find yourself having to work hard just to avoid foreclosure when you are past 60 years. Cindy, a former Verizon employee, earning over $80,000 each year, found herself in this position.

She had been given an opportunity to take early retirement at the age of 50. When she left, she rolled over her 401K and retirement payout and bought a variable annuity that would give her a handsome monthly check. It sounds like a well thought out retirement plan. Unfortunately, a little over ten years later, Cindy had to get a 10-dollar an hour job instead of enjoying her golden years. She is a reminder that you can make some considerable mistakes that can jeopardize your retirement years.

 

Common retirement mistakes

 

a. Withdrawing a lump sum too early

Cindy and many other aging employees are occasionally offered the opportunity to take early retirement. This may seem tempting, but you should consider the minimum age to withdraw any amount from your retirement fund. The minimum age is normally 59 years to enjoy the reduced tax benefits. In Cindy’s case, she retired over nine years before the optimal time.

When you retire early, you lose your current source of income. Lest you have a lot of cash saved up, keep working until you are at least 55 years old. You will avoid the steep 10 percent penalty for early withdrawal. Like Cindy, leaving too early may force you to work during your retirement years.

 

b. Poor diversification strategies

The current trend for most people is rolling over to an IRA to increase your investment opportunities. This can be rewarding for most people, but some poor investment decisions can be costly. You need to balance between high-risk and low-risk investment options.

In the case of someone who invests in stocks, securities, and gold, ensure you have a 40/40/20 diversity strategy. Your stock investment should never exceed 40 percent, your securities investment should never go below 40 percent, and gold should account for no more than 20 percent of your portfolio. Every six months you should review the state of your IRA and adjust the percentages if they seem to deviate.

 

c. High fees

The retirement investment plan with the lowest administrative fees is the Thrift IRA or 401K. However, the returns are the lowest for any retirement account. Most people prefer IRAs because of the diverse investment options. However, many IRA custodian companies have many hidden costs. If you are not attentive, you may end up paying between 1-2 percent monthly administrative fees. Certain annuities and IRAs have high administrative costs, and you should perform proper due diligence to ensure that you choose the right custodian for your retirement savings.

 

d. Pending loans and mortgages

If you still have a lot of debt, most of your monthly income will go towards paying these loans and mortgages, regardless of how good your retirement plan is. It is always advisable to clear your credit card, mortgage, and student loan debts before your retirement age. If you are unable to clear, you can take a small lump sum and pay off the debt.

 

e. Poor transition into retirement

Another difficulty is transitioning from your normal life to that of a retiree. Even though you are only as old as you feel, your financial situation changes the moment you retire. In some cases, you do not have to make any massive changes. However, most retirees have to adjust to a low monthly income and an increase in some expenses. Your insurance premiums are adjusted upwards after retirement, and you need to make some tough decisions to ensure you live within your means.

One recommendation is considering selling your house and buying another one in retirement communities. When you bought your house, one of your main considerations may have been how close it is to your workplace. However, after retirement, you can sell it and buy a much cheaper home elsewhere, especially if you are still paying a high mortgage.

 

Making retirement mistakes is quite easy. You need to avoid these common mistakes to ensure that your retirement plan does not end up in disarray. Your retirement years should be as peaceful and stress-free. Just make sure you properly diversify your savings, you avoid taking IRAs from custodians who charge a high administrative fee and make logical decisions on how you will transition into retirement.