401ks have been around for years and have been an ever increasingly popular way to save money for retirement. 

More and more businesses run some type of deferred contribution plan and they are a great way to attract and retain key employees.

401ks are great from an employee standpoint because they are relatively quick to sign up for, fairly easy to pick funds in and once the initial set up has been done, your contributions are taken out of your paycheck automatically. 

It’s an easy way to save.

But, did you know that by contributing to your 401k you could be creating a giant time bomb?  Here’s a look at why:

What is a tax deferred account?

 A tax deferred account is simply an account that allows you to put in pre-tax contributions for retirement.  The money inside grows without having to pay taxes every single year – they are deferred until some time down the road.

Things like 401ks and IRAs and for small business owners – Simple IRAs and SEP IRAs are examples of tax-deferred accounts.

What is a retirement time bomb?

A retirement time bomb is when you put all or most of your retirement savings into these tax-defferred accounts like 401ks and Traditional IRAs.

When you get into retirement and start withdrawing your money, you have to pay taxes on every single dollar you pull out!

At what rate?

It depends, but the money you pull out is taxed as ordinary income, which means for those of you who think your taxes will go down in retirement – you might be in for a big surprise when all of that money is taxed as though you earned it!

For those of you who have socked away a lot of money into tax-deferred accounts for retirement – these have become a ticking time bomb waiting to explode! 

And Uncle Sam is licking his chops!

What should you do about it?

1. Figure out how much you need for retirement
2. Re-evaluate your accounts – determine if you are properly balanced from a tax perspective
3. Consider other options – look at accounts like Roth IRAs to detemine if it’s right for you.
4. Make a plan to diversify from a tax perspective – figure out how muchyou can get into a tax-free bucket and start shifting money either through contributions or Roth Conversions.

What about you?

Are you holding a retirement time bomb?  What have you done to diversify yourself from a tax standpoint?

Perhaps you’re sitting there scratching your head, wondering what happened to your plans! 

Whatever grand allusions you had for retirement – whether it was spending more time with family, more time volunteering or simply more time seeing the wonders of the world  - maybe you find yourself thinking “I may never be able to retire.”

Here are five reasons why you’re off track for your retirement goal and what to do about it.

Market Tank

The 2008-09 recession wiped out many a 401k  and along with that many retirement dreams were dashed!  We’ve had a great recovery so far and many people have gotten back some of their losses.

However, not everyone has the luxury of waiting around for the market to recover fully.

What to do:

Consider postponing retirement and/or reducing your lifestyle.  You may need to cut back the dreams of traveling every three months or getting that second home in Florida. 

Also, re-evaluate your risk tolerance and time frame and consider making some changes to your portfolios.  If you find you have a longer time frame, you may be able to afford a bit more risk to make up some losses.

You Lack Specific Retirement Goals

Is retirement just a grand dream that has no plan of action around it?  You know the old cheesy saying:

Aim for nothing and you’ll hit it every time

There’s some truth to that.  Those who have a plan, review it regularly – making changes as needed – are more likely to reach their goals!

What to do

Take some time and write down what it is you’d like to accomplish.  If you’re married, I highly suggest getting on the same page with your spouse. 

Write down things like:

• When you’d like to retire
• What you’d like to do in retirement (i.e. – travel, volunteer, golf, short-term missions)
• How much money you’ll need for retirement
• How much you currently have saved

Compare where you’re at with where you’d like to be at retirement and consider a course of action to help get you there.

You Make Emotional Decisions

“Markets are down – SELL!”,  “Markets are up – BUY!”, “I want a new 50″ TV – BUY IT”

Are you like a yo-yo when it comes to financial decisions.  This is a sure way to get off track for your retirement goals!  Emotional investing and decision making doesn’t work and will lead to some pretty bad choices.

What to do

If you change direction like the wind consider developing a plan you are comfortable with in good times and in bad.  Consider your risks, your goals and your temperment and get a plan and stick to it only making tweaks as needed.

You Don’t Know When to Sell

This can relate to emotions, but on a broader scale it’s fairly easy to know when to buy an investment.  Most people can identify a deal.  Last March when stocks were half off, there were a lot of deals to be had.

The tougher part is knowing when to sell.   Since March, markets are up some 60% – knowing when to sell is hard.  Why? Because we all want to think a rising investment will continue and we don’t want to sell early and have the stock take off

We’d rather hang on too long than give up some growth even though we might be up some 30%!  Perhaps it speaks to our greed.

What to do

Rebalance your accounts regularly.  Rebalancing simply means getting back to your original asset allocation model by selling investments that are high and buying investments that are low. 

In other words if you start with a 50% stock; 50% bond portfolio and through market growth you are at 60% stock; 40% bonds – sell 10% of your stocks and reinvest into bonds.

There’s a lot of debate at how often you should do this, but I suggest at least annually and if you’re able to perhaps check the percentages quarterly to see how far from your originals you are.

You Don’t Know How Much You Need for Retirement

This was referenced above, but deserves it’s own point.  It seems like many people have no idea how much they need for retirement!  Many people assume they need a million dollars or some other really high amount and therefore they think “I’ll never be able to get there”.

What to do

Retirement is up to you!  Not the government, not your company – it’s up to you.  Therefore it’s vitally important to sit down and figure out what you want to do, how much it will cost and figure out how much you’ll need for retirement. 

Don’t just take these broad “You need 70% of your pre-retirement” figures you find in some financial magazine as truth! 

Everyone is different – therefore your goals are different than mine.  Make a personalized plan to figure out what you need.

How about you?

What else would you add to the list – what else have you found helpful in your retirement planning?

In part 1 we looked at the retirement that is mentioned in the Bible and also the idea of rest that the Bible is flooded with. Now let’s look at retirement defined and re-defined.

Definition of Retirement

Merriam Webster defines retirement as:

withdrawal from one’s position or occupation or from active working life.

Unfortunately many people often think and define retirement as quitting work altogether and not doing anything. 

As if retirement consists of sitting on the couch and mumbling (Christian) expletives at Drew Carey for ruining The Price is Right! 

3 retirement types

There’s basically three retirement types if we boil it down to the basics. 

1. My Timers - ”Retirement is my time!”, you’ll hear them say.  They do what they want, when they want and who they want to do it with!  They think of retirement as a time to finally live for themselves.
2. No Timers – “I’ve got no time to do anything because I’m so busy”, is the creed they live by.  They fill their schedules with all kinds of errands, busyness and other things that eat away their time.
3. Give Timers – “How can I help, where can I volunteer” are questions they always ask.  They view retirement as an opportunity to serve others.

You can see the differences among these three types.  The first two are selfish with their time, energy and resources and think that retirement is all about their enjoyment.

The last one “get’s it” from a Biblical perspective that their time, talents, energy and resources are a gift from God that should be used to serve and bless others.

Here’s what is ironic about the Give Timers - living that way is about their enjoyment – they enjoy being a blessing to others.

I think the Bible is pretty clear that we are called to serve others and to love them as ourselves and that includes during retirement.  In fact I would say – especially in retirement because we don’t have employment constraints to work around.

Redefining Retirement

 Perhaps it’s time to rethink and redefine exactly what retirement is from a Christian perspective.

Instead of us thinking, “I can’t wait to retire so I can relax or play a million rounds of golf with my buddies, or buy that winter home I’ve always wanted” - we should think about community outreach, church ministry, volunteering at non-profit organizations and missions trips. 

Are golf, relaxing or winter homes evil in and of themselves?  No!  By all means – enjoy them.  What I’m trying to suggest is that we don’t view those as the prize! 

Jesus is the prize! 

I want you to see that retirement frees up time for endless possibilities for the kingdom of God! 

What Does This Mean for You?

If you’re holding on to your retirement dreams and goals as an idol - this means you probably need to have a heart-to-heart with God and ask Him to reveal what you need to let go of.

It’s not wrong to desire retirement enjoyment and do things you’ve always wanted to do.  But, this may mean you need to re-evaluate your motivations. 

In my opinion, what we often fail to realize is there will be rewards in heaven for what we do here on earth, which are designed to maximize our joy both here and especially there!

Let’s blaze a new trail - one that redeems retirement!

There’s no question that 401k’s have become the norm for retirement savings.  More and more companies are putting the responsibility of saving for retirement on the employee and have gotten rid of traditional pension plans.

401k Popularity

According to a 2007 Hewitt & Associates survey, 64 percent of plan sponsors said they use a 401k for their organization’s primary retirement-savings program. That’s up from about 35 percent just 10 years ago.

Not only do employers like the 401k, but many employees love them as well.

Why people love their 401ks

Ease of Use

Most 401k plans are pretty easy to sign up for and begin saving into.  A couple forms, a couple signatures and you’re on your way to putting a percentage of your income away for retirement!

Bigger contribution limits

Unlike Traditional or Roth IRAs, which cap your contributions at $5,000 (with a $1,000 catch-up contribution if over age 50) the 401k allows up to $16,500 with a $5,500 catch-up contribution over 50!

If you’re making a good income, this is a great way to get additional money saved up for retirement.

Tax treatment

Contributions are tax-deferred, which means you don’t have to pay taxes on gains each year.  They are deferred until you withdraw your money in retirement.

Not only can you defer your taxes, you can also take a deduction on your contributions.  In other words, you get to deduct (or subtract) the amount of your contributions against your ordinary income.

That’s a pretty sweet deal.  Say you make $80,000 and put away $16,000 – your ordinary income is reported to be $64,000!

Why you shouldn’t love your 401k!

Limited Control

Here’s what I mean:

1. The employer chooses which company you will use (i.e. Fidelity, Vanguard etc)
2. In general, the employer chooses which funds you can pick from (you may only have 15-20 options)
3. You only have 11 years to control your withdrawals (59 1/2 – 70 1/2 – there are penalties for withdrawing before that and penalties if you don’t withdraw after that).

Government Forced Withdrawals

Many people don’t realize this – but at age 70 1/2 the government forces you to take money out of your 401k (unless you’re still working).

How can the IRS force you to take money out?  By whacking you over the head with a 50 percent penalty for not taking the withdrawal!  50 percent!!

So all that money you’ve managed to save up for retirement – and perhaps you don’t need – you MUST withdraw.  Why would the government do this?  To get tax revenue silly!

401ks are Tax Infested

This is the biggest reason not to fall in love with your 401k.  All those taxes you deferred for all those years have to be paid some time.

People often assume their income will be lower in retirement and therefore their tax bracket will be lower – which means that they’ll pay less taxes.

That’s not necessarily true.

You’ll probably want to maintain your standard of living, which means you’ll need the same amount of income.  Factor in inflation and depending where tax rates are - you could actually be paying more in taxes than you ever imagined!

That pretty balance you had on your 401k statement isn’t really yours.  You may be giving 25 percent or more back to good ol’ Uncle Sam.

These things are loaded with taxes.

If you pass away, your beneficiaries are forced to take money out (again think penalties here) and will have to pay ordinary income tax on every single dollar that’s pulled out at whatever tax rates apply to them!

What should you do?

Use it wisely

The last thing you want to do is throw the baby out with the bathwater as the ol’ saying goes.  The bottom line is you need to use the 401k wisely.  If your employer is matching contributions – you want to definitely take advantage of that!

Make informed decisions.

Take a look at your situation to determine if you’re creating a tax-infested monster.  Crunch some numbers to determine if using a Roth IRA or Roth 401k is better for you.  There’s some handy calculators out there that will help you figure this out.

Diversify

Diversify yourself from a tax perspective.  In other words, make 401ks and IRAs, taxable accounts, municipal bonds and Roth 401ks and IRAs a part of your overall tax strategy.

Bottom Line

Don’t get caught up in the hype of 401ks.  That doesn’t mean you don’t use them, but just don’t fall in love with them!  Make informed decisions and understand what you’re saving into.

What about you?  Are you in love with your 401k?  What have you done to diversify yourself?

Wouldn’t you agree it doesn’t take an Ivy League education to be good with your finances?

What’s amazing to me is that many smart people make some really dumb financial mistakes!

It seems like a person blessed with “brains” would be good with personal money management, but sometimes this just isn’t the case.

I’ve talked with many very smart people who are making some very dumb mistakes.

Here’s a look at five of them:

1. Keeping Up With the Joneses

A lot of times it doesn’t matter how much money we make, we still want to keep pace with our neighbors or friends.

This is a sure way to get into trouble.

What’s ironic is that many times those same people we’re trying  keep pace with and impress are buying things they can’t afford with money they don’t have either.

Think of how much better off we’d be if we’d just learn to be content.

2. Spending More Than They Make

I see it time and time again – many smart folks spend way more than they make!

It’s personal finance 101.

I feel like a broken record on this site, but the ONE thing you must do to get ahead is to spend less than what you bring in.

3. Chasing Returns & Investing Emotionally

It seems like some very smart people will change investments so often looking for the next best thing to eke out an extra percent while throwing caution to the wind and completely overestimating their risk tolerance .

Like dogs chasing their tails, they try to catch that elusive “hot stock” or “hot fund” that will help them retire.

Typically, these folks will buy when stocks are up and sell when they’re down.

It’s no wonder that the 2008 Dalbar study showed the return for the S&P 500 for a 20-year period ending 2008 was 8.35% while the average equity investor earned 1.87%!

That’s a lot of emotional decisions and return chasing going on!

4. Borrowing From Their 401ks

This just doesn’t make sense to me, yet I hear about it a lot from some pretty smart people.

Borrowing your own money and paying yourself interest sounds like a great idea – that is until you look more closely at what you’re doing.

The opportunity cost of taking out an investment that could be earning higher than what you’re paying yourself in interest — plus the loss of compounding — not to mention the risk hazard of having to pay all of that money back or end up paying taxes on the money should you lose your job are all things that should scream “NO!”.

Yet, many folks borrow from  First 401k Federal like it’s their own personal bank reserve.  Your 401k should be (one of) the last places you get money from.

5. Leaving Money on The Table

There’s numerous examples of this, but here’s a few of them:

• Not putting enough money into their 401k to fully take advantage of the employer match – some folks don’t put in at all.
• Ever buy something that has a rebate attached to it and then forget to send everything in to collect on the rebate?
• How about automatically renewing your auto or homeowner’s insurance without shopping around to see if there are some better rates or even some discounts to be had.
• Have you ever gotten an insurance policy when you were maybe a little overweight or perhaps a tobacco user and then later you lost weight or quit smoking?  Guess what!?  Your insurance company can re-issue a policy to you with lower premiums!

This is all money that’s being left on the table!

The Kicker

Whether you are “smart” or not really doesn’t make a difference.  You see, we’re all prone to these mistakes.  The “smart” people will be the ones who change their habits and start doing the things necessary to become better stewards.

My goal is not to pick on the smart (or not-so-smart), but rather point out a few areas that we are all prone to making mistakes in.

How about you – What are some mistakes you’ve made?

What are some other things that could be added to this list?

Wouldn’t you agree it doesn’t take an Ivy League education to be good with your finances?

What’s amazing to me is that many smart people make some really dumb financial mistakes!

It seems like a person blessed with “brains” would be good with personal money management, but sometimes this just isn’t the case.

I’ve talked with many very smart people who are making some very dumb mistakes.

Here’s a look at five of them:

1. Keeping Up With the Joneses

A lot of times it doesn’t matter how much money we make, we still want to keep pace with our neighbors or friends.

This is a sure way to get into trouble.

What’s ironic is that many times those same people we’re trying keep pace with and impress are buying things they can’t afford with money they don’t have either.

Think of how much better off we’d be if we’d just learn to be content.

2. Spending More Than They Make

I see it time and time again – many smart folks spend way more than they make!

It’s personal finance 101.

I feel like a broken record on this site, but the ONE thing you must do to get ahead is to spend less than what you bring in.

3. Chasing Returns & Investing Emotionally

It seems like some very smart people will change investments so often looking for the next best thing to eke out an extra percent while throwing caution to the wind and completely overestimating their risk tolerance .

Like dogs chasing their tails, they try to catch that elusive “hot stock” or “hot fund” that will help them retire.

Typically, these folks will buy when stocks are up and sell when they’re down.

It’s no wonder that the 2008 Dalbar study showed the return for the S&P 500 for a 20-year period ending 2008 was 8.35% while the average equity investor earned 1.87%!

That’s a lot of emotional decisions and return chasing going on!

4. Borrowing From Their 401ks

This just doesn’t make sense to me, yet I hear about it a lot from some pretty smart people.

Borrowing your own money and paying yourself interest sounds like a great idea – that is until you look more closely at what you’re doing.

The opportunity cost of taking out an investment that could be earning higher than what you’re paying yourself in interest — plus the loss of compounding — not to mention the risk hazard of having to pay all of that money back or end up paying taxes on the money should you lose your job are all things that should scream “NO!”.

Yet, many folks borrow from First 401k Federal like it’s their own personal bank reserve. Your 401k should be (one of) the last places you get money from.

5. Leaving Money on The Table

There’s numerous examples of this, but here’s a few of them:

• Not putting enough money into their 401k to fully take advantage of the employer match – some folks don’t put in at all.
• Ever buy something that has a rebate attached to it and then forget to send everything in to collect on the rebate?
• How about automatically renewing your auto or homeowner’s insurance without shopping around to see if there are some better rates or even some discounts to be had.
• Have you ever gotten an insurance policy when you were maybe a little overweight or perhaps a tobacco user and then later you lost weight or quit smoking? Guess what!? Your insurance company can re-issue a policy to you with lower premiums!

This is all money that’s being left on the table!

The Kicker

Whether you are “smart” or not really doesn’t make a difference. You see, we’re all prone to these mistakes. The “smart” people will be the ones who change their habits and start doing the things necessary to become better stewards.

My goal is not to pick on the smart (or not-so-smart), but rather point out a few areas that we are all prone to making mistakes in.

How about you – What are some mistakes you’ve made?

What are some other things that could be added to this list?

Success!  Wikipedia defines it as:

The achievement of an objective or a goal.

When it comes to retirement many of us want to achieve our goals.  The fact is, for most of us retirement is a marathon race and not a sprint so it’s important to have some ideas in mind to keep you on the right track.   Here’s a look at seven tips to successfully achieve your retirement goal:

Start Now!

“But I didn’t get an early jump on saving when I was younger, so what’s the point”.  It doesn’t matter.  If you haven’t saved anything yet – you need to start ASAP!

If you have started saving already – reevaluate the amount you’re putting away and determine if you can begin putting an extra $50 or $100 (or whatever amount you can).

Define Your Goals

Of course you have to know what target you’re aiming for if you’re going to hit it.  If you don’t have some defined goals you’ll really have no idea how to evaluate your progress.

This is Planning 101.  What do you want to achieve?  When do you want to achieve it?  Maybe it’s a certain dollar figure in your 401k or a goal to retire at a certain age.  Or, maybe it’s to have enough money to do short-term missions trips or serve at homeless shelters.

Sit down and jot some ideas on a piece of paper with your loved one so you can get a taste of what you’d like to do.

Determine Your Time Frame

Now that you’ve got some idea of what you want to accomplish and perhaps the age at when you’d like to retire determine how many years you have to make that happen. 

If you want to retire in five years, but you’re not really saving much right now and you’re strapped with debt – maybe you need to reconsider. 

Realistically determine your time frame and keep this number in the back of your head as you make other decisions regarding retirement.  If you need to start putting more away, sit down and take a look at expenses you can cut out or cut down on and make a huge effort to save more.

Determine Your Risk Tolerance

Now that you have your time frame set and your goals in mind – you can determine how much risk you should be taking.

Generally speaking, the shorter your time frame – the less risk you should be taking.  If you’re in your 30’s and you’ve got 30 years til retirement you have some time to make up any losses.

However, if you’re in your mid 50’s and you’ve got less than 10 years you may want to pull the reigns in a little and shift to a less aggressive portfolio mix.

Comfort level with your risk plays a big role in determining your tolerance as well as knowing how much you need to retire.  If you don’t need that much more to achieve your goal – you can scale back the risk.  If you need more – you may need to dial it up a bit to get some gains.

Diversify Yourself

Diversification comes in three areas:

1. Investment – Diversify your portfolio and your asset classes.  You don’t want all your eggs in one basket as the old cliche goes. The reason is because you don’t know what’s going up or down from one year to the next.
2. Time – Diversification from a time standpoint essentially means that you have some shorter term investments as well as longer term investments.  It also means you plan for the unexpected (think short life span) as well as longevity.
3. Tax – This means you spread your savings among taxable; tax-deferred and tax-free accounts to take advantage of the unique tax benefits of each.

Become Debt Free

To me, this is huge.  If you can become debt free before you retire you free up opportunities to give more during retirement, you releive the stress of needing to have a bigger nest egg or larger monthly income stream.

Debt can be bondage.  Ideally, you’ll be in a much better position if you can pay off all your debts including your mortgage. 

Now I know some will argue that there will be lost tax benefits.  Sure, that might be, but some of that can be made up from charitable deductions (goal: give away the amount you’d pay in mortgage interest!). 

Freedom from debt is liberating – and you’ll be glad you wiped them out before you retired.

Review Your Goals Often

In order to stay on track you need to have set reviews.  These can be done annually or semi-annually.  The point is to schedule time to sit down and revisit your goals, check your progress and determine if any changes need to be made.

You won’t know how far off course you are if you don’t review.

Hopefully these tips will give you a start in achieving your retirement success. 

How about you?  What other tips would you add to the list?

Runners, take your marks!

Your heart pounds as you anxiously await the starting gun.

With your fingers touching the ground, you get your legs in position ready to spring out of the gate.

You’re ready for the race of your life.

You hear the sound of the gun and get a good jump!

Your early lead seems to be holding.  You kick it into full gear - there is no one in front of you!

Yes!  You pass the 100-yard marker and begin to slow down.  You did it!  You just won the biggest race of your life!

With your arms raised in the air and your eyes closed you celebrate this great moment.

And suddenly you feel other runners passing you.

Get out of the way!!

What’s going on?   You ask one of the judges what is happening and he informs you that this is not a 100-yard sprint, this is a marathon.

Embarrassed and completely winded you start to run again, but it’s hard to get back on track.

Ok.  So this is an unlikely scenario, but when it comes to retirement there are many folks who are doing this very thing.

They start out of the gate early with good intentions of saving and investing for their retirement goal, but fail to keep up with the plan after a few years.

Some get a good jump by investing aggressively without knowing their risk tolerance thinking they will make a lot of money only to have their hopes dashed by a market correction.

The retirement race is a marathon - not a sprint.

Marathon runners pace themselves for a long distance – sprinters shoot out of the gate with a blast of speed for a short run.

Here are 5 ways to win the marathon race to retirement:

1. Save Early and Save Often

The sooner you get started with saving for retirement the better off you’ll be.

With a good mix of investments and compounding interest working,  your accounts should grow very well for you over time.

This takes the pressure off of having to make up for lost time by taking on too much risk for your investments and exposing yourself to a potential downturn.

2. Dollar Cost Average

Dollar cost averaging (DCA) is a simple investing strategy that invests equal dollar amounts on a regular basis over time.

For example, saving $100 monthly into your Roth IRA is dollar cost averaging.  By doing so you buy more shares when prices are low and fewer shares when prices are high.

The result is a lower average cost per share in the investment over time.  Although there is debate on how well this strategy works in a rising market, it’s clear that in a volatile market it is difficult to know when to buy in.

DCA is a way to take the worry and stress out of trying to time the market for the short term and rather focus on regular savings over time.

3. Diversify, Diversify, Diversify

A lack of a properly diversified portfolio is one of the common mistakes people make with their investments.

Why?  Because we don’t know what goes up or down from one year to the next, so spreading your investments over various asset classes is key to a long-term retirement strategy.

Finding a good model portfolio within your risk tolerance will help reduce the risk of exposure to a poor asset class or security in a given year.

4. Don’t Borrow From Your 401k

Your 401k should be the last place you get money from if you need it.

Many people think that it’s not such a bad idea.  After all, you are paying yourself back with interest right?

Theoretically yes, but the opportunity costs and the risks are too great.

First the opportunity costs.  You may pay yourself back with say 6% interest, however, if the market goes through a great stretch like we’ve just seen from March through September 2009 where the S&P 500 is up over 50% you not only lose out on that loan money earning interest, but also the compounding affect that could have been helping you.

The risks associated with a 401k loan are too great as well.

If you lose your job, quit or retire while the loan is still outstanding you are required  to:

• Pay back the loan in as little as 30 days, or
• Pay income tax on the borrowed amount at your marginal tax rate
• Pay a 10% penalty if you are younger than 59 1/2

A 401k loan can ruin your momentum for the retirement race.

5. Define Your Goals and Review Them Regularly

You can’t just set it and forget it when it comes to retirement.  Face it, economies, situations and goals change.

It’s important to define your goals so you have something to shoot for.  After all, you can’t hit a target when it doesn’t exist.

Secondly, you should review those goals regularly so that you can make any tweaks and adjustments as necessary along the way.

With some discipline and hard work you too can win the race to retirement!

If you haven’t yet, consider staying current with Redeeming Riches by receiving my posts FREE through email or RSS Feeds here.  Also, follow me on Twitter here.

We all make mistakes – some of them are just more costly than others.

When it comes to our retirement savings there’s a host of mistakes that could cost you.

Because companies are shifting the responsibility of retirement on the employees, it’s vital to correct any of these mistakes as quickly as you can.

1. Bad Methods for Choosing Funds

I’m just not sure which funds to choose so I picked what did well last year

Perhaps you’ve found yourself saying that before.  Picking funds based on past performance is a losing proposition because past performance is no guarantee of future results.

An all-star fund could turn into a dog for a variety of reasons.  Don’t rely only on past performance to make your decisions.  

I didn’t know what to pick so I asked my co-worker what he did.

Bob might be a great guy, but he could be a total goofball when it comes to investing.  Sure, he talks a good game, but your needs and goals are different.  Don’t base your investments on someone else.

I figured I’m aggressive so I just went with a more risky stock fund

It’s OK to be aggressive, but using only one or two funds will typically increase your volatility and expose you to greater risk.  You need to diversify the holdings.

2. Not Diversifying Your Investments

Don’t put all your eggs in one basket. 

Diversification simply means spreading your money over various types of funds and asset classes (i.e. small, mid, and large sized stocks etc.).

The reason you want to diversify is because we don’t know what will go up or down in any given year.  You can take advantage of rising stars and also soften the blow on investments that are stinking it up.

Check out MSN Money’s Asset Allocator tool, which is a good start if you are unsure what type of allocation to use to diversify your account.

3. Not Knowing Your Risk Tolerance

I want to make big returns in my 401k without much risk

Really?  Let me know when you find something like that because I’d like to use that too!

Of course we all want to make good returns without much risk, but those investments don’t exist – if they do, they are typically too good to be true.  (Can you say – Bernie Madoff?)

You need to understand your risk profile and how that impacts your decision-making with your 401k funds.

For guidance in this area, here are five questions to help determine your risk tolerance.

4. Not Paying Attention to Company Match

 Although the recession has led many companies to forego their 401k matching programs, there are still some who offer some sort of match. 

A big mistake often made is not knowing what kind of match the company is offering resulting in leaving free money on the table.

If a company is matching dollar for dollar up to – say five percent, it’s silly to only put in three.  You’re leaving an additional two percent out there that could be matched.

At the very least you should be putting enough into your 401k to take full advantage of any money they are going to give you.

Pay attention to the details of your company’s matching program and by all means take what they are willing to give you!

Reaching retirement is up to you, so make sure you are doing all you can to correct mistakes early so you can reach your goals.

Remember as a kid how excited you were for your birthday to come?  It couldn’t arrive fast enough!  Presents, cake and everyone making a big deal of you was great! 

You probably couldn’t wait to turn 13 and finally become a teenager.  Then maybe you looked forward to 16 so you could get your license.  18 to vote.  At 21 you could legally drink and 25 got you a discount on your auto insurance. 

After that, you may have spent the rest of your time wishing you were 25 again.

It’s in our nature to look forward to milestones.  After all, they are a rite of passage and a big achievement.

Did you know you’ve got some retirement milestones to look forward to?

Being unaware of these milestones will cost you money!

Milestone #1 – Age 50

In 2002, the government changed the rules on contributions to retirement plans and IRA’s.  They allowed a “catch-up” provision for older individuals.  If you are age 50 or older, you may now contribute an extra $1,000 to your IRA’s and an additional $5,500 to your 401k’s in 2009. 

This is a great deal for those looking to sock some extra cash away for retirement!

Milestone #2 – Age 55

Age 55 is a big deal for those looking to retire early for the simple fact that if you retire or separate from service the year you turn 55 or after, you are allowed to take 401k distributions without getting whacked with a 10% penalty! 

Let me say that again…NO PENALTY for early retirement distributions.  This is known as the “Age 55 Exception”. 

Get this – if you roll your money to an IRA, the deal is off the table.  That’s right, you must leave it in the 401k, but you are allowed to take out as much as you want, whenever you want.

Milestone #3 – Age 59 1/2

I doubt most of you celebrate Half Birthdays, but this is one you’ll want to throw a party for!

This is the traditional age in which you can withdraw your retirement money without fear of Uncle Sam hitting you over the head with a 10% penalty for pre-mature distributions.

Milestone #4 – Age 62

62 is a big age as well for the simply because you can now qualify for Social Security benefits.  It doesn’t mean you have to take them or even that you should take them, but you at least have the option available to you.  Don’t forget it will be a reduced benefit, but a benefit nonetheless.

Milestone #5 – Age 65

At this age you are now qualified to take Medicare, which is social insurance including two main parts.  Part A covers hopsitalization and Part B acts as your medical insurance. 

If at this point you are not receiving Social Security benefits then you need to apply for Medicare and will want to do that three months before you turn 65.

Milestone #6 – Age 66-67

If you were born between 1943 and 1954 then your full retirement age (FRA), or the age in which you can collect 100% of your entitled Social Security benefits is age 66. 

For those born in 1955 you have to wait an additional two months.  The government adds two more months to the waiting period for each year until 1960 (i.e. if you were born in 1958, your FRA is age 66 and 6 months). 

If you were born in 1960 or beyond your FRA is age 67. 

I hear a lot of people tell me “I can’t retire until 67″.  What they usually mean is they can’t collect full Social Security benefits until age 67.  You can retire whenever you want, you just won’t get your full benefits until then.

Milestone #7 – Age 70 1/2

Here is another one of those Half Birthdays, however, this one doesn’t justify much celebration.

In the year you turn 70 1/2 good ol’ Uncle Sam says you MUST start pulling money out of your IRA’s or 401k’s. 

What? Surely that’s a typo right?  Sorry to bear bad news, but you MUST start pulling money out of your retirement plans. 

In effect, Uncle Sam says to you, “Great job saving that big chunk of money in your 401k and deferring the taxes for all these years, we love you, now it’s time to pay the Piper, which is why we love you even more at this age!”

What do I mean by MUST?  Well, if you want to try to get around pulling money out and paying taxes on it, just realize that you will be subject to a 50% penalty on your distribution!!  Ouch!

This is known as RMD or Required Minimum Distributions.  There is a special formula based on life expectancy that the IRS uses to determine your RMD.  See these worksheets at the IRS website for more info.

One last note on the 70 1/2 rule.  This only applies to your pre-tax retirement accounts.  In other words, money that you have not previously paid taxes on.  So, your Roth IRAs (which consist of after-tax money) do not apply when discussing RMDs. 

So What.

Now that you know about these important milestones what should you do about it? 

If you are unsure how much you need for retirement and are trying to decide where to save more money you may want to keep the 70 1/2 rule in the back of your mind.

Regardless of age, it makes sense for you to look into whether a Roth IRA is right for you.  You might be able to contribute to them OR you might be able to convert existing pre-tax money to a Roth IRA.

If you are 50 or older that’s easy – you should be socking away as much as you can for your retirement.

If you want to retire early you might be able to take advantage of the age 55 exception and early Social Security Benefits.

Knowledge is key to making the right decisions when it comes to retirement.  Don’t let your birthdays come and go without taking advantage of opportunities that exist for your retirement.

______________________________________________________________________________________________

If you liked this post, consider becoming Financially Healthy through email  or my RSS Feed here.

______________________________________________________________________________________________