Retirement Planning Mistakes

	.
	Retirement Resources All about Social Security Income Understanding Savers Credit How to get a good financial start Understanding Pension Plans How to build a complete portfolio All you need to know about 401(k) Choosing an Investment Advisor Understanding Wealth Accumulation
	..

Common Mistakes in Retirement Planning

Are you looking for choice, control and flexibility when planning for retirement? If so, the defined contribution retirement plan or 401(k) is an excellent tool for you. But, with the opportunity comes the responsibility to make informed choices and sometime we don't make good decisions. Everyone makes mistakes but successful people catch them early and correct them promptly. Are you making mistakes when it comes to your retirement planning? This is a difficult questions and sometime people don't even know the answer. This article explores some of the most common retirement planning mistakes that people make. Take a closer look and you may be surprised to find some of the items on the list

Here is our list of the top avoidable mistakes made by today’s retirement plan investors:

Not Participating in the Plan

The worst thing you could do is to not participate in the retirement plan. Remember, if you're counting on social security, you have to realize that it is not going to replace 100% of your pre-retirement income and on top of that social security may go bankrupt by 2042 if congress doesn't do something quickly to fix it. You're also paying lot more in taxes by not participating in a retirement plan since contributions are pre-tax(no federal, state or FICA taxes taken out).

Not Contributing up to Employer Match

Here is another mistake that some people commit. This mistake is sometime a result of lack of information and understanding of the plan. Here is an example, Let's say you work for a company A that offers a 401(k) plan with 50% matching contribution up to 6% of your salary. So if you make $50,000/year and contribute 6& of your salary($3,000), your employer will contribute 50% of your contribution($1,500) per year. This gives you a 50% return on your investment up front. Where else can you get a better return than that? Bottom line, contribute to the maximum so that you could take full advantage of your employer contribution and make your employer’s contributions work for you.

Starting Contributions too Late in Life

Some people do not understand the power of compounding. Compounding is the key to any retirement plan growth. In simple terms, compounding s nothing but your earnings generating more money by earning interest in later years. In the last part of your retirement investing, most of your growth is going to come from the earnings and interest that you have earned all these year. Remember, any dividend paid is also re0invested to get you even better results. There is absolutely no excuse for delaying your retirement plan. If you always find yourself short on cash, may be it is time to get a second job rather than electing to skip a retirement plan.

Lacking Diversification/Putting all Your Eggs in one Basket

It is easy to lose focus and invest more and more in a good performing mutual fund or stock. However, you should always keep an eye on your risk tolerance. Remember, questions you should ask yourself is not how much you can make with your investment but how much you could lose? Some employers offer company stock as an option for their retirement plans and employees tend to invest heavily believing that they already know the company so there is no risk. Regardless of your confidence in your employer, always diversify and mitigate your investment risk.

Emotional Response to Stock Market Corrections

It is important to understand that a stock market can not go up forever. Having bull and bear market cycles are important for the health of overall market and your investment should focus beyond short term cycles. IF your portfolio is not doing great, check the overall market conditions to make sure that it is the market and not the bad individual stocks that you may have in your portfolio. If you're convince with your investment decisions, stay calm and make rational, not reactive decisions.

Investing Based on the Advice of Friends/Relatives

It is your 401(k) account and your money so why would you make decision on someone advice who has no vested interests in your success. IF you find it difficult to make financial and investment decisions, seek professional advice and let them figure out the best option for you based on your circumstances. Do not make decisions that are driven by speculations, greed or someone's tips. Investing for your retirement is a serious business with no place for speculations and gambling.

Too Conservative in Your Approach

Is there such a thing like "too conservative" when it comes to investing? Whether you believe it or not, there are people who fail in investing because they are too conservative. For example, if you're in your early twenties and put all your money in money market account, you're not going to go too far with your retirement planning. You might as well stuff your cash in a pillow and forget about it for next 40 years. The whole idea of investment planning and strategy is to figure out a risk level that you can tolerate for your age and timeframe and work from there. If you don't understand investment strategies, seek professional help but make sure you have an investment strategy that aligns with your retirement goals.

Taking Too Much Risk

This is just other extreme of what we just discussed. Being too aggressive with your investment may cost you some serious money. Remember, if you lose 50% of your portfolio, you'll have to now post 100% gains just to get back to your original amount. Taking too much risk is number one reason for most investment failures. Your risk level should also change with your age and time left to retire. There is nothing but trouble if you're in your late fifties and invest all your portfolio in some overseas funds with no history or credentials. Instead of chasing risky double digit returns, it is far better to stick with more stable and reputable single digit returns.

Market Timing

Never ever try to guess the market direction or price change. Some people tend to make investment moves to take advantage of market timing. While there is no denying that it sometimes works, there is absolutely no guarantee that it would work when you want it to. In long run, you will lose lot more money if you play market timing. It is a dangerous game so don't play it. Market timing is for professional hedge funds managers and even they get it wrong. Also, If you don't feel comfortable with the price fluctuations of individual stocks, it might be a better idea to invest in mutual funds since they can spread your risk over a basket of stocks instead of individual stocks.