10 Retirement Pitfalls: Investing Too Aggressively

June 19th, 2007  |  Published in Investing  |  Comments Off on 10 Retirement Pitfalls: Investing Too Aggressively

The other side of #9 Investing Too Conservatively is this last pitfall, being too aggressive with your portfolio. 100% in foreign small cap stocks is probably too high for anyone, while you do have the potential for high returns, you also have the potential for high losses. While it is advocated that younger investors take some sort of risk, taking too much risk is just as bad as taking too little risk. For the older investor, you want to balance your desire for high returns with your need for capital preservation. If you take a 20% hit in your 40s, that could derail your retirement plans and push you to work a few more years to make up for it. Find that happy middle ground based on your risk tolerance and age.

Source: Yahoo Finance

10 Retirement Pitfalls: Investing Too Conservatively

June 19th, 2007  |  Published in Investing  |  Comments Off on 10 Retirement Pitfalls: Investing Too Conservatively

The general rule is that you should be aggressive when you’re younger and conservative when you’re older. Being too conservative when you’re young doesn’t take advantage of the one asset you are slowly losing, time; by being aggressive, you try to get the high returns while risking some losses. If you are young and your portfolio takes a hit, you have plenty of time to let it grow back upwards. If you’re older and your portfolio takes a hit, you have less time and so you want to minimize the downside.

The rule of thumb for how much of your portfolio to hold in stocks is 120 minus your age, that value is the percentage you should hold. The rest should be in more stable investments such as bonds.

Source: Yahoo Finance

10 Retirement Pitfalls: Not Using IRAs

June 18th, 2007  |  Published in Investing  |  Comments Off on 10 Retirement Pitfalls: Not Using IRAs

I would’ve listed this particular pitfall higher up on the list, probably behind Not Getting 401K Match, since it’s similar to that pitfall; but this one involves not taking advantage of the various IRAs that may be available to you. Roth IRAs allow you to do some tax-free investing and other IRAs allow you do some tax-deferred investing, either way your principal grows without the burden of tax.

One other considering is that there may come a point when you can’t take advantage of an IRA, the 2007 income phaseouts for the Roth IRA starts at 95k and ends at $110k (single filers).

Source: Yahoo Finance

10 Retirement Pitfalls: Not Having Insurance

June 16th, 2007  |  Published in Retirement  |  Comments Off on 10 Retirement Pitfalls: Not Having Insurance

Accidents happen and usually they’re expensive. When you’re lucky enough to have an accident that isn’t expensive, hopefully you have an emergency fund to help you through it; when you’re unlucky and have an accident that is expensive, hopefully you have some sort of insurance that can cover it. If you don’t have insurance to cover a fire, illness, major auto accident, or any natural disaster – get it. It’s like a reverse lottery that you don’t want to win, but if you do you want to make sure you’re covered. If you’re not, paying for an accident could put a severe damp on your retirement saving (or even force you to dip into existing retirement savings to cover the gap).

Source: Yahoo Finance

10 Retirement Pitfalls: Buying Too Much House

June 15th, 2007  |  Published in General  |  Comments Off on 10 Retirement Pitfalls: Buying Too Much House

This is similar to the “Avoid Credit Card Debt” pitfall, don’t buy too much house. Whereas credit card debt is bad because interest is high, an expensive mortgage is bad because it’s usually going to be around for a long long time (which I suppose is much like credit card debt if you can’t pay it off quickly). The pitfall is that buying too much house ties up cash that could otherwise go towards retirement investing and the fact that money tied up in a house is much harder to access:

While a house does have some tax advantages on the mortgage loan, they are not nearly as good as the tax advantages of a 401(k) plan or an IRA. It’s also much more difficult to get your retirement money out of the house than from a retirement fund. While housing as an investment is something you might want to consider to create more wealth, your own house should not be viewed as a retirement investment, and you should make sure that you can pay your mortgage and contribute to your retirement fund at the same time.

Source: Yahoo Finance

10 Retirement Pitfalls: Depending On Windfalls

June 14th, 2007  |  Published in General  |  Comments Off on 10 Retirement Pitfalls: Depending On Windfalls

Anytime you depend on someone else, you run the risk of that person not coming in for you; when it comes to retirement, you do not want to depend on anything except for your own work. You don’t want to depend on inheritances, you don’t want to depend on Social Security, and you don’t want to depend on pensions. Ask the employees of Delta whether they would still depend on a pension, or the employees of Enron or Worldcom; likely the answer would NO because their pension funds are gone, replaced by pennies on the dollar insurance payout from the Pension Benefit Guaranty Corporation (PBGC).

Inheritances, which was the focal point of the pitfall, are even trickier because your parents (or benefactor) may need that money for something. Sure, the account may look fat and happy now, but it just takes one medical issue to drain an account down to its last pennies. If it’s not in your account, it’s not yours and you can’t depend on it.

Source: Yahoo Finance

10 Retirement Pitfalls: Avoid Credit Card Debt

June 13th, 2007  |  Published in General  |  Comments Off on 10 Retirement Pitfalls: Avoid Credit Card Debt

I like to think of retirement saving as building a house and its crucial for one to have a solid foundation onto which to build this house, having credit card debt is the antithesis of having a solid foundation. When you’re talking about retirement, it’s about growing your nest egg… which is extremely difficult if you need to service a debt with an interest rate as high as some credit cards charge. Unlike other common types of debt, such as auto loans or mortgages, it’s especially painful because the debt is at a high interest rate and it’s not even deductible.

Avoid credit card debt (and debts from bookies!) at all costs.

Source: Yahoo Finance

10 Retirement Pitfalls: Not Getting 401K Match

June 12th, 2007  |  Published in Retirement  |  Comments Off on 10 Retirement Pitfalls: Not Getting 401K Match

You like getting free money? Sure, me too, so why would anyone ever not contribute to their 401k and get their employer match? Well, there are people who do this and it’s absolutely unbelievable. If you just started working, review your benefits package to see whether your company offers an employer match on 401k contributions. If they do, make sure you’re taking part otherwise you’re leaving good money on the table for no good reason.

Source: Yahoo Finance

10 Retirement Pitfalls: Waiting

June 11th, 2007  |  Published in General  |  Comments Off on 10 Retirement Pitfalls: Waiting

The power of compounding means that every year you wait, you don’t lose one year’s interest… you actually lose on the tail end of the compounding equation. Let’s say you have a maximum compounding interest lifespan of thirty years, starting when you’re twenty five. If you wait until you’re 26, you don’t lose interest from the first year… you lose it from the 30th year because you now only have 29 years to earn compounding interest.

Let’s say you start with $100 earning 10%. The first year, you earn $10. If you let that grow for twenty nine years, on the 30th year that 10% is actually worth $160, not $10. Take that difference and extrapolate it to a retirement balance of several hundred thousand and it’s BIG money. Don’t wait.

(Math check please: In year 29, your $100, growing for 29 years at 10%, is worth approximately $1,586.31. 10% of that is $158, or about $160.)

Source: Yahoo Finance