For most people, retirement is an opportunity to spend time with family, concentrate on hobbies or relax as you enjoy your golden years. However, there are retirees who have lost most of their assets and suffer from financial stress due to poor retirement planning and other mistakes. Here are six retirement planning mistakes you should avoid to improve your retirement benefits.
Taking loans from your retirement accounts
Many people treat their retirement accounts as emergency funds that can bail them out when they are in financial distress. However, each time you borrow money from your IRA or 401K, the money no longer grows. Even if you repay that amount in full, the opportunity cost is always higher. Additionally, when you leave your job while you still have the loan from your IRA or 401K, the loan may be treated as an early withdrawal incurring a hefty early withdrawal charge.
The best practice is setting up an emergency fund to ensure that you do not withdraw any retirement savings. You will have better growth of your savings.
Failure to diversify
The financial crisis was a harsh reminder of the importance of diversifying your retirement account. Even the versatile 401K was prone to losses due to stock price drops. You should always diversify to ensure you never lose your entire retirement savings. For the shrewd investor, diversification acts as a guarantee against catastrophic loss of your retirement savings. Diversification also offers an opportunity to improve your returns if you have a high-risk appetite. A caveat is to ensure you diversify properly to avoid unnecessary losses.
Rolling over or cashing out of your retirement
When you stop working for a specific employer, you are presented with three options. First, you can let the retirement plan remain as it is. This option is useful when you do not have any job to fall back on or an alternative retirement account. Second, is rolling over your retirement account to your new employer or an IRA Trustee Company. Most people are unaware that you should only rollover a portion of your retirement savings. You can have a Roth IRA and 401K at the same time. Completely rolling over to gold and other IRAs can increase the risk of losses.
Finally, you can simply cash out the money. Cashing out of your retirement savings is the worst mistake you can make. One reason is that any cash out before 59 years carries a substantial penalty for early withdrawal. Additionally, you lose all the money you had saved in your retirement account, and you have to start saving a fresh. In most cases, you end up retiring with savings that are not sufficient to accommodate your monthly expenses.
Poor portfolio balancing
Even though diversification is an effective way of protecting your retirement savings, you need to have the right balance. Proper diversification is important, especially when you have an IRA with the freedom to invest in high-risk stocks. A common approach used is 50/50 investment in securities and stocks. However, stocks tend to grow faster than securities, and in a few your years you will end up with 30/70 proportion of securities and stocks.
Since stocks are riskier than securities, ensure you readjust your portfolio to reduce the risk of loss when stock prices plummet. If you also have gold in your IRA, a 20/40/40 portfolio of gold, securities and stocks should be used. Proper diversification will always cushion your IRA from losses.
Failure to maximize your employer’s match
Most employers offer IRAs or 401Ks with match programs that most employees fail to capitalize. Most employees build their IRAs or 401Ks using employer contributions. However, match programs in the retirement scheme mean that the employer will match the contributions you make to your retirement plan.
In most cases, the match covers no more than 3 percent of the salary. However, any employer who contributes 3 percent of the salary gets a similar amount in their IRA from the employer. It may not seem as much, but it means that each year your personal contribution will amount to 6 percent, even though you only contribute 3 percent of your salary. You double every amount you contribute.
Failure to seek fiduciary help
There are numerous options on how to invest your retirement savings. Most IRA trustee companies concentrate on their interests rather than those of their clients. Fiduciary services may be a tad more expensive than the conventional financial adviser may, but they are law-bound always to give advice that benefits you as a client. Fiduciary financial planners have helped many people protect their retirement savings by guiding them to make the right investment decisions.
Your retirement years are supposed to be beautiful. However, the mistakes highlighted can be the source of anguish. Understanding the impact of your decisions will ensure you avoid the pitfalls most people make. Before making any decisions that affect your retirement savings, ensure you conduct proper due diligence on the effects.