Personal Financial Planning: Overcoming Common Retirement Mistakes

Next Installment of a Five-Part Series

 

Ready or not, retirement is coming. The quality of life that you enjoy during your retirement years depends upon the quality of retirement planning completed earlier in your career. So if you have high hopes of sand between your toes, be sure you’re aware of typical retirement planning errors and the best methods for ensuring that healthy glow.

So what are the most common retirement planning mistakes?
1. Lack of planning and/or starting too late: Retirement planning is something that younger people often don’t enjoy considering, and this “ostrich effect” has impacted many retirements. With regard to retirement saving, starting earlier is always better.
2. Not saving enough: According to CNNMoney.com, 43% of Americans have less than $10,000 saved for retirement.
3. Retiring too soon: Some people simply want to enjoy their retirement years but underestimate the amount of money that requires. Further, both health problems and longer lifespans may erode one’s retirement capital and reduce the quality of life that they can afford.

An Unbalanced Three-Legged Stool
The “three-legged stool” retirement concept identifies three major sources of retirement income from Social Security, employer-sponsored retirement plans, and personal savings (usually in the form of defined benefit plans) and the balanced result they should provide.

However, employer contributions by many companies have declined as have the retirement savings rates of many Americans. And, according to the Employee Benefits Research Institute’s 2009 Retirement Confidence Survey, 32% of Americans think that Social Security will provide a significant source of their retirement income. Meanwhile, most experts predict that the Social Security System will start to deteriorate after 2016 when the program’s expenses start to exceed revenues as many Baby Boomers hit retirement age. How long the system will survive is the subject of much political debate, but planning for alternatives to Social Security is definitely a smart bet, so let’s focus on strategies related to employer-sponsored plans and personal savings.

Solution 1: For employees, the 401(k) is a “no-brainer”
Beginning in the 1980s, the 401(k) gained popularity due to its ability to allow for contributions by both employers and employees, unlike a traditional company retirement plan strictly funded by employers.

By 2011, 60% of Americans nearing retirement age had 401(k) type accounts according to the Wall Street Journal. Yet, if so many are participating in 401(k) accounts, why are so few are ready for retirement? One common reason is that company employees do not take advantage of employer matching contributions in their company retirement and 401(k) plans. If an employee works at a company for a substantial length of time and an employer contributes regularly to the plan, this match is “free money” that is contributed at the right time where it can grow and compound tax-free. The real trick is to get these matching funds into the employee’s 401(k) as early during their working careers as possible so the investment has the maximum time to grow.

Solution 2: Wisdom of Individual Retirement Accounts (IRAs)
Most of us should increase our personal savings to utilize (or more fully utilize) one or more of the many tax advantaged retirement plans that exist to help Americans save for retirement and save taxes in the process.

IRAs have evolved since their introduction in 1974 as a way for taxpayers to build retirement savings while reducing their taxable income by the contributed amount. The maximum contribution has increased in recent years (and differs dependent upon the type of IRA) and includes the ability of people over 50 to make an additional “Catch-Up Contribution” to help Baby-Boomers save more and depend less upon a stressed-out Social Security System.

There is a wide range of IRAs available that includes:
• Traditional IRA – Contributions are often tax-deductible, earnings within the IRA are tax-free, and withdrawals at retirement are taxable. And the recipients usually find themselves in a lower tax bracket during retirement that helps extend their funds.

• Roth IRA – Contributions are made with after-tax assets, earnings are tax-free, and withdrawals are usually 100% tax-free. For many people, the Roth yields better overall performance than a traditional IRA.

• SEP IRA – Designed for the self-employed person or for small businesses, this account permits the establishment of a retirement plan allowing the employer to contribute in the employee’s name instead of the company’s name.

• Simple IRA – A simplified employee pension plan similar to a 401(k), it allows both employer and employee contributions but with lower contribution limits and less costly administration.

It’s all about making the right decisions at the right time.
Due to the difficulty of making predictions, it is important to speak with a highly qualified and trusted advisor throughout the retirement planning years. CRI is not in the business of selling retirement accounts, but we consider retirement funding as part of an overall life plan. We can help you map out a balanced retirement strategy that allows you to live the life you want to lead that is complete with the sunglasses of your choice and plenty of Vitamin D—no milk required.