A Penny Saved

It must be mistake week in the news. Last night U.S. News & World Report had an article by Kerry Hannon about “5 Mistakes that will Sink your Retirement”. Below are his five points and some personal commentary:

1. Cutting back on Contributions.

According to the article, 1/4 of American workers do not contribute to their 401(K) and many who do contribute do not give enough to get the full company match. That’s tossing away free money. Also, there is a tendency when times get tough to try to free up some cash by cutting back on retirement saving. That’s short term gain for long term pain. Unless it is a dire emergency, don’t cut back.

2. Using Retirement Savings as a Bank

Too many people borrow from their 401(K). Sure, you need to pay it back, but you are losing ground. And once you tap into, there is the temptation to go back and tap it again, and again. You end up “sacrificing compounding investment earnings.” This is a fools game. Leave it alone!

3. Avoiding losses by reinvesting in safer places.

None of us likes to see our account balances fall, but we need to hold our ground. Taking money out of equities and putting them into money market funds or bank CD’s will cost you more in the long run. Stocks, no matter how poorly they do in the short run, give you the best shot for long term growth. If you stay out of the market, it will cost you more over the long run than some temporary setbacks. Decide on your portfolio mix - stocks, bonds, etc., then stick with it, rebalancing as necessary.

4. Cashing out your 401(K) Balance

When leaving one job for another, or even for early retirement, it makes sense to cah out your balance - as long as you roll it over to an IRA or another tax deferred plan. And you only have 60 days to do so or the IRS will come knocking on your door (and maybe with a 10% penalty added!). Make sure you cross your T’s and dot your i’s with the correct paperwork.

5. Not having a post-retirement plan.

Some of us are so focused on saving for retirement that we forget retirement itself! We need a financial plan for the “golden years.” What will be your sources of income? How will you tap into your savings? What portfolio mix should you have during the retirment years? What about healthcare?

Not a bad article. Again most of it is common sense - but then sense always isn’t so common is it?