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Five mistakes to avoid when planning your retirement

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Posted: May 16, 2008 4:13 p.m.
Updated: July 17, 2008 5:01 a.m.
 
A recent article in the May 12 issue of U.S. News & World Report addressed the mistakes people make when the market is very volatile and discouraging like we are experiencing these days. Even people with
stable jobs face swelling gas prices, utility bills, health insurance premiums and other expenses that make extra cash for retirement elusive.

With distractions like a turbulent stock market and a shaky economy, it's easy to take your eye off the ball and forget your ultimate financial goals.

Following is a look at five retirement planning mistakes people need to avoid.

Mistake 1: The biggest blunder is cutting back on your contributions to a 401(k) plan, since most companies offer matching funds - the ultimate cash freebie. In general, 401(k) plans are set up so that the employer adds 50 cents to each dollar a worker contributes, typically up to 6 percent of your salary. That's an immediate 50 percent return on your investment.

And, if you are 50 or older, the IRS will lend a hand. You can make catch-up contributions, and this year those eligible for catch-up contributions can toss in an extra $5,000. You can also contribute an extra $1,000 to a traditional or Roth IRA. So, while younger savers can put $5.000 into an IRA, people 50 or older can save $6,000.

Mistake 2: Don't use your retirement savings as a bank. It may be reassuring to know you can always borrow from your 401(k), but, if you take out a loan and then get laid off or the company is bought out,
you'll probably have to pay back the loan right away. If you can't repay the loan, it will be treated as an early withdrawal. That means you will owe income taxes, plus a 10 percent penalty if you are under 59 1/2.

Not only does it create an easy way to get a loan, you lose the benefit of compounding your investment earnings.

Mistake 3: When you see account balances falling, it's reasonable to want to avoid losses by reinvesting in safer investments. Don't. As gut wrenching as it might be, it pays to hold your ground. The tendency is
to move into more stable investments like money funds or CDs to avoid losses and ride out the downturn. As one adviser states, "Don't think you will have a crystal ball to tell you when to get back into the
market." If you get out of equities, you will miss the upturn when the market turns around. That is costly. History tells us that timing the market this way doesn't work and that you would be a fool to even try
doing it. Downturns do end, and if you stay in the market, you will be there when it turns around.

Mistake 4: One fast way to undo all your good retirement planning and squash your future nest egg is cashing out your 401(k) balance when switching jobs or being ushered out the door with an early-retirement plan. This would be taxed at your current ordinary income tax rate, and if under 59 1/2, an additional 10 percent added penalty. The best option would be to roll it over to a self-directed IRA that offers you more investment choices.

Mistake 5: An important error many individuals make is not creating a post-retirement plan. As you approach retirement, you should know all your sources of income, ranging from pensions to investments to Social Security. Also, consider the amount of equity you have in your home.

Then establish a plan for how you will spend those funds in retirement. Generally, you want to tap into your tax-deferred savings last. If possible, delay taking Social Security as long as you can, as it increases substantially by waiting. If you can wait until age 70, benefits increase by about 7 percent each year you delay from age 62 through 66, and by 8 percent until age 70 for those born in 1943 or later, says Laurence Kotlikoff, an economics professor at Boston University. Plus, your actual payment will be indexed for inflation. So, if inflation is running at 3 percent, your benefit will increase at 10 or 11 percent for each year you delay taking it.

Good retirement planning requires patience and fortitude. As noted above, retirement planning takes discipline, planning and foresight. To help safeguard against making mistakes, you should consider working with a financial advisor. This way, you will have a better chance of reaching your goals.

Jim Lentini, CLU, ChFC, IAR is president of Lentini Insurance & Investment. His column represents his own views and not necessarily those of The Signal.

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