Saving for retirement shouldn’t be a guessing game. It should begin with your first job and in most cases not stop until you are collecting Social Security. Yet millions of people struggle to do anything at all, and still more make glaring mistakes.
To help you get started and avoid common traps, Four Seasons Financial Education, a financial wellness and education provider, has identified the top five retirement mistakes of employees at its client companies:
- Over-relying on rules of thumb. Simple rules can be instrumental in getting a worker started saving early and putting them on the right path. Saving 10% of everything you make is better than being paralyzed and shooting for eight times final salary — and definitely better than having no goal at all. But rules can get you into trouble, too. The presumed 4% safe withdrawal rate in retirement is anything but perfect, and retirees with a traditional pension have far different savings needs than those without one. Use rules of thumb as a guidepost and to get started. But at some point you need a customized plan.
- Going too conservative at retirement. As you age, you should gradually reduce portfolio risk by tilting more towards bonds. The previous point notwithstanding, a useful rule of thumb is subtracting your age from 110 to arrive at the percentage of stocks you should own. You may feel old at 65 but you may also live another 30 years. You will need stocks for growth if you expect your nest egg to last that long. Asset allocation is among the most important aspects of retirement planning to get right. If you want to keep it simple, consider a target-date mutual fund which adjusts automatically.
- Taking Social Security benefits early. Although changes may occur with the Social Security system it will remain viable for many years and probably be a meaningful part of your retirement income. Your monthly benefit jumps 8% every year you delay filing between ages 62 and 70. For a lot of people, waiting to 70 and living to age 83 is the break-even point, and everything they collect from then on is a bonus.
- Failing to use a retirement calculator The web has many useful online tools and since your retirement may last 30 year or longer you need all the help you can get. Computers are a tremendous aid. Don’t guess. Some of the best tools can be found at CNNMoney, T. Rowe Price, Fidelity, Schwab and BlackRock.
- Cashing out retirement assets early Financial planners and policymakers have long puzzled over how to prevent leakage from 401(k) accounts as workers quit jobs and fail to roll over all their assets into an IRA or similar account. The temptation is mighty; especially if you have debts you want to retire. But with taxes and penalties this is a costly move. The money you saved over five years might require 10 to replace.