AOL's Top 5ive Retirement Mistakes to Avoid

Saving for retirement is harder now than ever given the current slumped economy. Even if you have been diligently putting portions of your paychecks aside for retirement for years now, one investment mistake could ruin your retirement plans. According to AOL’s Top 5ive Retirement Mistakes to Avoid, you should avoid each of the following:

Procrastination

It’s easy to push aside retirement if you’re only in your 20s because it seems like such a futuristic concept. According to the benefits consultant Hewitt Associates, slightly more than 50% 20-29-year-olds participated in a 401 (k) as of the end of 2008.

Most young adults are understandably more concerned about paying off things like student loans and credit cards they racked up in college and also about making ends meet right after college and into their late 20s. This generation is probably also nervous to invest for fear of a market crash in this sometimes-unpredictable economy. Neglecting to save for retirement during these early years of your life is a huge mistake. When you invest in a 401 (k), your earnings grow tax deferred. Thanks to the power of compounding interests, deposits made toward your retirement earlier on in your life will have a lot of time to increase.

For example, if a 25-year-old contributes $5,000 per year to a 401 (k) with a 7% annual rate will see just short of $1 million by the time they are 65. If they start putting in this same amount at age 45, however, they will only save $205,000 with the same rate.

Failure to Diversify

It is true that the markets and the economy have been slumping lately, but you shouldn’t react to these changes with extreme conservatism in your investments, says Benjamin Tobias, a certified financial planner from Plantation, Fla. You should be able to exercise your 401 (k) to the fullest of its potential, so make sure you have a variety of stocks and bonds.

Younger investors with plenty of time to regain losses before retirement should be riskier in their investments by approaching with a larger percentage of their money (usually 80% of their portfolio) in high-growth stocks, according to Tobias. Investors who are in their 50s should be more conservative in their approach by using more cash and bonds, but while keeping around 60% in equities.

Consider investing in a target-date fun if you feel uncomfortable choosing your own holdings. These mutual funds aim toward a specific age group and gradually become more conservative as its investors near retirement age.

Mismanagement of Your 401 (k)

Pamela Hess, director of retirement research at Hewitt Associate says you’re the one calling the shots with a 401 (k). She offers these tips to be a “good custodian” while you have time before retirement:

Get the company match: It is not uncommon for employers to pledge to match their employees’ contributions up to a certain percentage of their salaries. Typically this match is 50 cents for every dollar up to 6% of your paycheck, says Hewitt Associates. If you don’t contribute enough to meet the full match, you are conning yourself out of free money, and roughly 30% of workers make this mistake, says Hess.

Rolling over your 401 (k): If you change jobs, don’t forget to roll over your 401 (k) investments to your new provider. If you fail to do this and you’re younger than 59 ½, you will be cashed out of your 401 (k) only after your holdings get hit with the normal tax rate in addition to a 10% penalty.

Tapping your 401 (k) before retirement: According to Hess, only tap into your nest egg if you desperately need the cash. She says, “It needs to be a very last resort. That’s un-repairable damage.” And she warns to proceed with caution since you only have five years to repay money you withdraw. After this time period, the IRS will tax the distribution at normal levels (which can be as high as 35%) and invoke a 10% federal penalty on top of that.

Retiring Too Early

Hess says that, even during healthy market years, few people are fully prepared to retire early. With today’s economy, it’s even harder to be ready for early retirement. Hess says, “Most people are going to have to work longer to make up for what happened [to their portfolios].”

If your course of action involves withdrawing more than 4% of your retirement assets in the first year, for example, Hess advises to hold off a while. The first year of retirement sets the stage for how much you plan to take in future years, and it can be a really great indicator of the likelihood that your money will outlast your life.

Don’t forget to factor in health insurance costs. If you are younger than age 65, you’ll have to bridge the gap between when your employer’s health coverage benefits stop and when Medicare begins. Purchasing private health insurance can be quite costly, so don’t forget to keep this expense in mind.

Also remember Social Security. If you start receiving it at age 62, you will receive reduced benefits. If you wait until age 66, however, you will receive full benefits (currently $27,876 per person per year). The rule of thumb in regard to Social Security is to wait until full retirement age, but it might make more financial sense for you to receive Social Security checks at a younger age and thus leave your 401 (k) investments to grow tax deferred for additional years.

Not Investing During Retirement

Just because you have retired doesn’t mean you should stop investing and planning further for your retirement! This is a very common mistake made by retirees. Greg McBride, senior financial analyst at Bankrate.com says, “Even if you’re 60 years old, you could still have a 30-year time horizon to invest. You need to preserve that buying power.”

To do this, you should avoid overly conservative investments early on in your retirement, which could hurt your investments’ ability to recover from market losses and outpace inflation. McBride says that, if you plan to retire at age 65, at least 45% of your portfolio should be in equities. If you are planning to hold a part-time job during retirement, you might consider putting some of your paycheck in a Roth IRA, which offers tax-free growth and an estate-planning benefit.