Common Retirement Planning Mistakes to Avoid
National Retirement Planning Week® 2016 recently took place from April 11 to 15 as part of a national effort to help people focus on their financial needs in retirement. Even though National Retirement Planning Week® 2016 as well as the month of April (which the U.S. has officially declared as “National Financial Literacy Month”) has come and gone, that’s no excuse to put the brakes on thinking about (and acting on!) your retirement planning and financial planning needs.
Here are some of the most common retirement planning mistakes to avoid:
- Failing to Plan: I’m sure you’ve heard the saying, which is most commonly attributed to Benjamin Franklin, “If you fail to plan, you are planning to fail.” This statement holds especially true when it comes to retirement planning and financial planning. For the best chance of ensuring retirement success, you must have a plan in place. It is prudent to meet with a financial advisor to discuss your retirement planning and financial planning needs and questions and put a plan into place. Remember, as discussed in the previously published Summit Brokerage blog entitled “5 Common Myths About Financial Advisors Debunked”, financial advisors are not just for the wealthy and older people.
- Starting too Late: Don’t wait until you are “older” to actively engage in retirement planning. Some people even say that you should start thinking about retirement planning the day you start your first job. Even putting away the smallest amount of savings right now can—over time—grow substantially and have a significant, positive impact on your retirement.
- Not Diversifying Your Portfolio: It is common to see an employee who has worked at the same company for a long time accrue a significant amount of that company’s stock in his or her investment portfolio. In such cases, some people fail to diversify their portfolio because they feel most comfortable investing in a company they “know” well or simply because of neglect or misinformation. Looking at things from a risk management and diversification perspective, a retiree’s investment portfolio should not have more than 5 to 10 percent of any one singular stock.
- Not Taking Advantage of Tax Breaks: They type of account you choose to use for retirement planning and investing is critical. While everyone’s financial planning and retirement planning situation is unique, typically using tax-favorable 401(k) plans and individual retirement accounts (IRAs) for investing for retirement are advantageous as they not only allow your tax-deferred earnings to compound over time but also with most of the traditional versions of these plans, you typically get a tax break on your taxable income every year you put money into one of these plans. If your employer has a program where they will match the funds you contribute to your 401(k), by all means take advantage of this program.
- Borrowing from your Retirement Plan: Just because you are able to “borrow” money from your 401(k) retirement account, does not mean you should. Oftentimes, the tax consequences can be catastrophic to your retirement planning and financial planning goals and lead to a vicious cycle of debt. Generally, if you fail to pay back your plan loan on time, the loan will be treated as taxable distribution. If you stop working for your employer—whether voluntarily or not—and still owe money on your plan loan, you most likely will be required to repay the entire amount the of the loan within 60 days. If you don’t, any outstanding balance on your plan loan will be treated as a taxable distribution. Plus, if you are under the age of 59.5, you’ll not only have to pay regular income taxes on the outstanding balance but also have to pay a 10 percent penalty tax. Ouch! One should also keep in mind the opportunity cost of borrowing from your 401(k) plan: you’ll be missing out on any tax-deferred investment earnings that would have accrued on the borrowed money had it stayed in your 401(k) plan account.
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Summit Brokerage Services, Inc. is part of Cetera Financial Group®, a leading network of independent retail broker-dealers. Summit Brokerage provides a broad range of securities brokerage and investment services to primarily individual investors. Summit Brokerage also sells insurance products, predominantly fixed and variable annuities and life insurance through its subsidiary, SBS Insurance Agency of Florida. Summit Brokerage also provides asset management services through its investment advisor, Summit Financial Group, Inc.
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