Dec 11
17
Retirement Savings Mistakes To Watch Out For
This year 2011 will see many Baby Boomers turning age 65. I want to cover 3 retirement savings mistakes Baby Boomers cannot afford to make.
#1 RETIREMENT SAVINGS MISTAKE: NOT SAVINGS ENOUGH
This is an easy one to cover because for many Baby Boomers do not have enough retirement savings. Their parents and grandparents had Social Security and a pension for income. The two combined was enough to survive and live a pretty decent retirement.
Today many Baby Boomers will only have Social Security for income. To make up the difference they will need their own savings. If you are under age 65 now is the time to increase your retirement savings to the max. You need to put the max into your 401k and your Roth IRA. If you do have retirement savings you need to figure out a plan to make it last. This leads to mistake #2.
#2 RETIREMENT SAVINGS MISTAKE: SPENDING TOO MUCH TOO SOON
Before you reach retirement you need to review your expenses and potential income. Yes this is obvious, but many wait until two or three months to set up a plan. One of the beST retirement strategies to make sure you money will last is the 4% Solution. (I went into detail in another article.)
A quick review of the 4% Solution. You do not want to withdraw more than 4% of your retirement savings account value. For example if you saved $500,000 you would not want to withdraw more than $20,000 a year.
When Baby Boomers retire they are going to see this large 401k balance of say $500,000 and try to figure out what they should buy. Maybe a new car for a retirement present or pay off the mortgage. This may sound good, but financially it may cripple your retirement and eat up your retirement savings.
An average Baby Boomer couple has a 50% chance to have one spouse to live until age 92. In addition a 25% chance one will live until age 97. The retirement savings may have to last 30 to 35 years. Spending too quickly could devastate the retirement plan.
#3 RETIREMENT SAVINGS MISTAKE: NOT TAKING ENOUGH RISK
Yes, this seems to be an odd mistake, but stay with me. Let’s say you retire today with $500,000 and decide to implement the 4% Solution. However, you decide to put all your money into bank CDs. Currently bank CDs only pay out about 1% to maybe 2% per year if your lucky. Now since your following the 4% Solution you are now taking out principal each year 4% vs. 1%.
Over the past decade the stock market has performed poorly, in fact one of the worst 10 year periods ever. Now this does not mean the stock market will continue to perform poorly because remember financial advisors tell us that, “past performance is not a guarantee of future performance.” This goes with both good and bad stock markets.
This being said most financial advisors recommend some portion be invested in some stock fund all the time. The amount depends on the individual investor. Some may want 25%, some 50%. Regardless, some percentage of a Baby Boomers retirement savings should be invested in stock mutual funds.
What about the remaining percentage of 50% to 75%. That should be allocated between bond mutual funds and cash such as CDs or money market funds. CDs do play a part in retirement savings plan, but not money you need to spend. The part of the 4% Solution you plan on spending should be in a money market fund or cash.
I hope this gives you some ideas and tips on what to avoid before and during your retirement years.
Teddy “Dutch” Danfield has been working in the finance related field for over 15 years. My goal is to assist and help Baby Boomers retire successfully. I to want to provide ideas and strategies they can implement into their own personal financial plan.
You can find additional articles and strategies at my website http://www.retirementsavingstoday.com.
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