Retirement-Wrecking Moves

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Retirement-Wrecking Moves
Denise Appleby, Investopedia 11.28.07, 6:15 PM ET

While retirement takes on different shapes and forms for many individuals, it should be a time to relax and enjoy the fruits of a lifetime of labor. But for many people, bad choices can push the retirement horizon out of reach. As such, it is imperative that individuals understand the effects of these bad choices and take steps to avoid them. Let's examine five of the worst choices that can sabotage your retirement.

Procrastination
Many individuals are forced to postpone retirement, sometimes indefinitely, because their retirement nest egg is not sufficient. This can be avoided by starting to save early, as doing so lessens the burden of saving for retirement. For instance, assume the projected amount needed to finance your retirement is $2 million. The amount you will need to add to your nest egg each year depends on how soon you start your savings program. Assuming a rate of return of 5.5%, and that you make even payments each year (for more on this topic, read "Why is retirement easier to afford if you start early?"), the annual payments you will need to make to your nest egg:

--Five years to do so, you will need to save $339,670.97 each year
--15 years to do so, you will need to save $84,598.29 each year
--25 years to do so, you will need to save $37,060.38 each year
--40 years to do so, you will need to save $13,877.43 each year

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Procrastinating your start date makes it harder to achieve your target savings goal. Even in instances where you can't afford to add the maximum amount that projections determine you need to save for the year, adding what you can afford can go a long way toward reaching your goal. For instance, consider that a savings of $200 per month, at a rate of 5.5% for 40 years, would result in an accumulated savings of $337,541. (To read more about how this works, see "Compound Your Way To Retirement.")

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Tip: Don't wait until you can add large amounts to your nest egg before you start. Find a financial institution that will accept small contributions for low fees. When you have accumulated enough, transfer your balance to an account where you can diversify your investments and receive higher rates of return.

Thinking It's Too Late To Get In The Game
Some of the common reasons for starting to save for retirement late in the game include pure procrastination, individuals having to start over after a divorce, and older immigrants who have the opportunity for the first time. Regardless of the reason, thinking that it's too late will only compound the issue. Instead, these individuals should look for ways to start saving.

For lower- to middle-income individuals, this may mean doing without many items that are not basic necessities. The need to work with a competent financial planner is even more pronounced in these cases, especially for individuals who are not experienced in the field of financial planning. Determining the amount you will need to finance your retirement is not an exact science, but with careful planning and realistic projections, individuals can achieve their financial planning goal for retirement--even those who are close to retirement. (For tips on the steps you can take when you start late in the game, see "Can You Retire In Five Years?", "Retirement Savings Tips For 45- To 54-Year-Olds," "Tips For 55- To 64-Year-Olds" and "Tips For 65-Year-Olds And Over.")

In Pictures: Ten Ways To Retire Comfortably

Missing Opportunities
While saving can be challenging, there are many opportunities that make it easier to save that are often missed because their benefits are overlooked. For instance:

--The saver's credit: Eligible individuals who take advantage of the saver's tax credit are able to reduce their taxable income by adding pretax or tax-deductible amounts to their retirement savings. They will also enjoy the benefits of tax-deferred growth on their retirement savings and receive a nonrefundable tax credit for the amounts they add to their IRAs, or salary deferral contributions they make to their employer-sponsored plans. This credit can be as much as 50% of their total contributions for the year, or $1,000, whichever is less. This means that for eligible individuals, the financial burden of saving could be reduced by up to 50%. (For more on the savers credit, see "The Saver's Tax Credit: An Added Incentive To Fund Your Plan.")

--Free money from employers: Employers that offer benefits under a 401(k) or SIMPLE IRA often include matching contribution features, and all employees need to do to receive these contributions is to make salary deferral contributions to the plan. Despite this, many employees fail to receive this benefit, often because of a lack of awareness and understanding.

An additional benefit of saving in a 401(k) account is that the funds are not as accessible as those in an IRA, which will reduce temptation for Johnny and help him to stick more closely to his savings program. (To learn more, read "Six Ways To Maximize The Value Of Your 401(k).")

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Not Considering Healthcare Needs
As one gets older, the need for heathcare increases. This includes the need for more frequent check-ups and preventative healthcare, and long-term care at home and in nursing homes. Individuals who fail to implement contingency planning to cover health-related expenses could find that a large percentage of their savings must be used to cover such expenses.

Costs for healthcare vary by state. According to AARP.org, in California, assisted living costs $32,512 per year versus $89,668 for a nursing home. This compares to $34,686 and $66,613 for Colorado, and $35,284 and $107,432 in New York, respectively. (For related reading, see "Failing Health Could Drain Your Retirement Savings.")

With a decreasing number of employers offering health coverage to former employees, affected individuals need to protect their retirement nest eggs by ensuring they have adequate health insurance. However, before choosing any insurance product, careful assessment must be done to determine which type of insurance is needed. For instance, long-term care insurance may not be necessary for someone with very few assets, but may be a necessity for others. (For tips on healthcare insurance coverage, see "Fighting The High Costs Of Healthcare.")

In Pictures: Ten Ways To Retire Comfortably

Spending Too Much Too Soon--Or Too Late
Individuals entering their retirement phase are often faced with the fear of spending too much too soon and, as a result, may hoard their savings to the point of just barely existing. While caution should be exercised to ensure that one's nest egg lasts throughout retirement, living on a diet of bread and water, only to leave the bulks on one's retirement nest egg behind takes caution too far to the extreme.

On the other hand, individuals who deprive themselves of leisure activities and finer things in life before they retire and choose to use the amounts saved to fund their retirement nest egg may find the urge to splurge during their early retirement years, without any regard for their remaining retirement years. Often, the end result is that what is left is not sufficient to provide a financially stable retirement. (For more on this, see "Enjoy Life Now And Still Save For Later", "Managing Income During Retirement," and "Determining Your Post-Work Income.")

As with any other financial phase, careful financial planning must be done to determine the retiree's available disposable income. For instance, before incurring expenses for any big ticket item, an analysis should be done to determine whether you can afford to make the purchase. The following should be taken into consideration:

--The amount you have saved
--Projected income, including Social Security income, pension and income from any other sources
--Your projected life expectancy. Making this determination is not an exact science, but your health status and age to which your ancestors lived, can be used as indicators
--Your projected living expenses

As your ability to engage in certain activities diminishes over time, it may be practical to enjoy those activities during the earlier part of your retirement, but not at the risk of spending it all in five years, when projections are that you will live for another 20 years.

For many individuals, retirement is the life stage during which they can realize their dreams of living an idyllic lifestyle, taking trips that have been continually postponed for varying reasons, and enjoying the finer things without worrying about the impact on their savings. However, failure to implement a realistic retirement financial plan can sabotage this goal to the point of making a comfortable retirement all but impossible. So don't make these mistakes--and if you already have, fix them before it's too late.

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