How your clients are wrecking their retirement

You may know better, but do your clients? Pamela Villarreal of the National Center for Policy Analysis shows us 10 basic mistakes investors make that wreck their retirement plans.

1. Failing to make saving a habit. It’s been shown time and again that setting aside a little bit of money on a regular basis throughout one’s working years produces a greater nest egg than setting aside a large amount later on.
2. Leaving matching funds on the table. Not taking advantage of an employer’s matching contributions to a 401(k) account is like turn?ing down a raise, Villarreal writes. “An employee who turns down a dollar-for-dollar 401(k) account match of up to 5 percent of his salary is passing up a 5 percent bonus paid with untaxed dollars.”
3. Borrowing against 401(k) savings. Individuals can lose thousands of dollars from their retirement plan through lost compound interest. A $25,000 loan today can cost more than $175,000 in lost retirement interest income over 30 years, Villarreal points out.
4. Cashing out 401(k) savings. If your retired clients cashed out their 401(k) accounts when they left their jobs, they may have lost one-third or more of the balance due to taxes and penalties.
5. Jumping in and out of the market. “In 2008, 401(k) plans lost an estimated $2 trillion in value,” Villarreal writes. “But this ‘loss’ would have been on paper only, were it not for the fact that many workers essentially locked in their losses by selling their equity funds during the recent downturn.”
6. Relying on home equity. This strategy does not always produce a significant profit on which to retire. Even before the housing bubble burst, the average home was a mediocre investment. As Villarreal points out, if a client invested $1 in stocks in 1963, it would have grown to $12.36 by 2006; the same dol?lar invested in a house would have grown to only $1.79.
7. Not diversifying savings. Villarreal calls a retirement portfolio made up of only one type of investment a “recipe for disaster.” “It is impor?tant to consider diversifying among asset types (stocks, bonds, money market funds), as well as diversifying within each type of asset (rather than holding one stock or bond).”
8. Underestimating longevity. A long, healthy life is certainly a boon, but it means retirees should have strategies to ensure they don’t outlive their money. Villarreal suggests working past retirement age, annuitizing retirement account money, and staying at least par?tially invested in stocks.
9. Ignoring inflation. When a household’s income, combined with half of their annual Social Security benefits, exceeds a certain threshold, a portion of their Social Security benefits are subject to federal income taxes. The thresholds are not indexed. Over time, inflation pushes more and more retir?ees into the income range where they must add 50 cents of benefits to their taxable income for every dollar their income exceeds the threshold. This means their marginal tax rate will be 50 percent higher!
10. Staying in debt. According to the 2004 Survey of Consumer Fi?nance, nearly 59 percent of seniors between 65 and 74 are in debt, compared with less than half 20 years ago. What’s more, the same demographic is struggling under more debt than the 1989 cohort. “Entering retirement debt-free is essential to being able to maintain a comfortable standard of living,” Villarreal says.