Five Retirement Planning Mistakes To Avoid
USATODAY.COM - Retirement planning is a whole new world when compared with the reliable three-legged stool that the World War II generation relied on.
"They had Social Security, pension plans and personal savings," says Robert Krakower, a financial planner and author of Redefining Retirement for a New Generation. "They would stop working and have guaranteed income."
The risk has shifted to individuals at a time when we are living longer. People of all ages and stages in life now find that retirement planning is more complicated.
We worry about higher health care costs as we try to figure out how to make our retirement nest eggs last longer. And young workers worry that they can no longer count on much support from Social Security. "It will be a minor player because benefits will go down, and the benefit age will go up," Krakower says.
Sometimes unexpected changes in life force us to start thinking about our future. Seven years ago Donna Addy, who has worked in travel and marketing, was living with her family in Maryland, when she unexpectedly became a widow at age 48
She first met with a financial planner to get a road map. She will receive full spousal retirement benefits, with health care and profit-sharing, from her husband's job at Procter & Gamble.
She next considered how to re-invent herself and how to bring more purpose into her life. She waited until her son graduated from high school and packed up and moved to Boca Raton, Fla. At age 55, she now happily works for a senior living center. And she has a list of other things she would like to eventually do, including an invention that she is working on and a women's workshop series that she wants to create.
"To me the term retirement feels static and antiquated," she says. "I am living my dream."
Where to start: Savings
Addy is embracing her future. Too often, people put their heads in the sand and don't start saving for retirement soon enough. It especially seems too far away for young people to worry about.
"We're not good at imagining our future in the long term," says Laura Carstensen, director of the Stanford Center on Longevity. "Many go into a denial stage. That doesn't mean they are slackers. They're trying to make ends meet. They are constantly faced with dilemmas that seem impossible."
Now that retirement rests on the shoulders of workers, they want better advice.
"As humans, we decide how we are supposed to act by watching the crowd," Carstensen says. For retirement, many look at what their parents have done and don't realize that everything has changed. People need a new infrastructure that helps them know what to do and makes it automatic and invisible and a little bit at a time, she says.
The recession has shaken people up and made retirement planning even more difficult.
No wonder many people are now saving less than they can and should, says Mike Alfred, co-founder and CEO of BrightScope, a provider of independent retirement plan ratings and investment research.
"That is the No. 1 retirement issue," Alfred says.
Both women and men are underfunded for retirement, but women have less, according to a survey released this month by Wells Fargo.
And about 30% of women 40 to 69 cannot estimate how much of their retirement savings they will need to withdraw annually in retirement, the survey says.
As complicated as retirement planning seems, unless you have a pension plan, you have three basic things to do:
You can try to increase your retirement savings by earning more money, spending less money and investing assets in a more efficient manner so you get a better return, says Michael Kay, a financial adviser in Livingston, N.J.
The most common mistakes
Unfortunately, it's often easier to ignore retirement and focus on more immediate needs. Among the biggest pitfalls that Americans fall into at different life stages:
•Focusing on marriage/careers.
People who are starting their careers generally are focused on paying for student loans, starting a family and having an emergency fund — not retirement savings. But if they have a company 401(k) plan and the employer offers a matching contribution, they should try to at least cover the minimum, experts say. You should think of it as free money.
Parents often put aside their retirement saving to focus on their children's college education. It's understandable that they don't want children to start out life buried in debt. "There is no better investment than investing in your own children, but not to the detriment of your own retirement," Krakower says. It's smarter for parents to exhaust all financial aid avenues before they exhaust their own future.
•Falling short on planning/research.
Many workers don't take a close look at their 401(k) retirement plans to check the fees and to pick the best funds.
Some plans only offer funds with costly fees. If the employer doesn't also offer a company match, workers may be better off investing in a Roth IRA, Krakower says. If you qualify for a Roth IRA, you can pick your own mutual funds to invest in, and once you turn 59½, withdrawals are tax-free.
•Assuming your job will be there.
Some people aren't worried about their retirement savings because they plan to keep working for many years. Last year, the number of workers 55 and older was at the highest level in 35 years, according to new research by EBRI.
Carol Wiley, from Madison, Miss., has worked for 62 years, and next month she will retire from her job as a legal secretary at age 78.
"Everybody asks me, 'What are you going to do?' " Wiley says. "It's whatever I want or nothing if I don't want to." She enjoyed working and thinks that it has helped keep her young.
And Wiley is not just going to sit back and relax. She plans to volunteer at her church and occasionally work part time at the law firm.
But young people should not assume that their life stories will unfold like Wiley's. If the recession has taught us anything, it is that jobs are not predictable.
"Some people say, 'I'll work until I'm 90,' " Kay says. "And I say, 'What makes you think you'll have the health, ability and flexibility to work until you are 90?' Anyone who thinks that their job is safe is living in a delusion."
It's best to start planning now and avoid putting retirement at the bottom of your list of things to do. And don't assume that it is only about saving money.
•Operating without a clear plan.
Many workers are pushing ahead, saving for retirement, without a plan.
"If you're going to plan for life, you have to know what that life is going to look like," Carstensen says. "It's hard to do it in the abstract."
Many times married couples have such busy, hectic lives that they don't even talk to each other about their retirement goals, Kay says. Others have watched their retirement savings plummet in value during the recession.
But that is not holding back Helga Stauch.
"I am retiring April 1st come hell or high water," says Stauch, 62, who lives with her husband, an engineer, in Newark, Ohio. Most recently she has worked at an underwriting service department for an insurance firm, and she was tired of always being at work and never at home. She doesn't expect her retirement savings accounts to climb back up to where they were before the stock market crash, but fortunately she says that she doesn't need a lot.
"I was raised that you live on what you have," Stauch says. And she tells anyone who wants to be rich in retirement: You'd better start saving when you're young.
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