Sunday, October 3, 2010

Retirement Planning - Mistakes to Avoid

Having a financially secure retirement is a top priority for everyone. If you can avoid the simple mistakes that millions of people make in their financial planning, it'll take you a long way toward realizing your dreams of a happier retirement.

A dire picture
Unfortunately, for those who are already approaching retirement, a lot of damage has already been done. According to a study from the Employee Benefit Research Institute, even covering basic retirement expenses and uninsured medical costs will prove beyond the ability of nearly half of those currently within 10 years of retirement. As many as two-thirds of low-income workers will likely run out of money in the first decade after they retire.

Even if you've gotten a late start with your retirement planning, it's never too late to take action that will make a big difference in your standard of living after you retire. If you're making mistakes like the following, fixing your finances can produce significant results much more quickly than you might think.
1. Not investing enough, especially in tax-favored retirement accounts
In planning for retirement, the amount you save now is the only thing you have 100% control over. But many retirement savers don't realize just how much they can set aside.

Tax-favored accounts like 401(k) plans and IRAs are often your best choice for retirement savings. With limits of $16,500 for 401(k)s and $5,000 for IRAs this year, you have a lot of freedom to enjoy tax-deferred growth. And for those age 50 or over, catch-up provisions give you even higher limits: $22,000 for 401(k)s and $6,000 for IRAs.

That may sound like a lot, but the last years of your career may be the most productive from an income standpoint, while expenses may actually decrease as children grow up and leave home. If you commit to saving a bundle in the years immediately before you retire, you can make up for a lifetime of missed opportunities.

2. Panic-selling solid stocks
It's always scary when a stock you own drops a lot. But selling after such drops often proves to be a terrible mistake when the stocks inevitably recover.

You can find plenty of examples of this from past experience. In 2008, Starbucks (Nasdaq: SBUX) dropped more than 50% as competition from fast-food maven McDonald's threatened its long history as the prime innovator in coffee. Frightened investors bailed out as the weak economy made $4 lattes look ridiculously out of touch with the times, and home-brew machines from Green Mountain Coffee Roasters (Nasdaq: GMCR) sold like hotcakes as cost-cutting consumers tried to bring the gourmet coffee experience home. But since then, Starbucks shares have more than doubled as the company has stayed on track and fought back with new initiatives of its own.

Similar situations appear every day. Yesterday, Adobe Systems (Nasdaq: ADBE) saw shares drop almost 20% as it released a disappointing forecast for the coming quarter. Yet for long-term investors, the real question is whether the company's Creative Solutions division and its Photoshop, Flash, and Illustrator products will eventually restore Adobe's growth momentum, not just next quarter but in the years to come. For smart investors, today's drop may prove to be a gift, not a calamity -- but only if you don't panic-sell.

3. Putting all your eggs in one basket
The biggest asset most people have is their earning potential. Since you rely on your employer for your income, it's a mistake to double your exposure by owning employer stock in your 401(k).

Unfortunately, lots of people do exactly that. According to figures from BrightScope, 65% of ExxonMobil's (NYSE: XOM) Savings Plan was invested in Exxon shares, while the figures for Procter & Gamble's (NYSE: PG) plan was 43%.

When problems come up, they can be disastrous. For Valero Energy (NYSE: VLO) employees, who hold 63% of their assets in employer stock, losing three-quarters of their money over the past three years has to hurt. And even though employees at Ford Motor (NYSE: F) and dozens of other companies have sued plan sponsors to try to get lost money back, the odds are most likely against them.

Stay smart
These mistakes are common, but they're also easy to avoid. If you take care not to make them, it will help you protect your retirement from the threats that so many won't see until it's too late.

SOURCE

1 comment:

Unknown said...

I really like your article regarding financial planning and thought maybe you readers would be interested in a free retirement planning calculator called Nest Egg Software.
It allows you to change things like retirement year, annual retirement income, and return rates for different baskets of money and see the results instantly.
Here is a quick overview of the software:
http://nesteggsoftware.com/blog/2010/06/free-retirement-calculator/