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Top 10 retirement planning mistakes

The timing couldn’t be worse: The largest generation in our history is approaching retirement age during the worst economic downturn since the Great Depression.

The need to build retirement security has never been greater. But one of the main obstacles is the current concept of retirement--the idea that people should stop working in their early sixties and take it easy. The number of years that you’ll have to fund after you stop working is one of the most important variables affecting retirement security. Paying for retirement has become more challenging in light of recession-ravaged 401(k)s and plunging housing values. And those resources must be spread over a growing number of years.

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There are no magic bullets or easy solutions. Yet in my work as a journalist and author covering retirement and aging, I’m often struck by the wealth of good ideas that experts have identified for achieving a satisfying, secure retirement - even in hard times.

These aren’t get-rich-quick investment gimmicks or schemes to make millions working part time from your kitchen table. Rather, the best ideas focus on basic blocking and tackling - getting the most from the financial tools already at hand, and making smart decisions about work and lifestyle.

For starters, you should avoid these 10 common mistakes that prevent many people from building retirement security.

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1. No planning. Most Americans don’t have a good idea of how much they need to save for retirement; only 44 percent of workers responding to one survey said they had tried to calculate what they would need, and an equal number simply “guess at how much they will need” for a comfortable retirement.

2. Underestimating longevity. Sixty percent of Americans live longer than they expect. At age 65, a woman can expect to live to an average of 84; the average for men is 81. But those figures are averages--many of us will live much longer. Planning to fund only to the average figures can leave you impoverished in old age.

3. Retiring too soon. Working even a few years beyond what you’ve planned can pay a surprisingly large bonus in retirement security. Age 66 is the typical retirement age (known as normal retirement age, or NRA) for most people, as defined by Social Security, but about half of all Americans don’t wait that long. You can avoid the early-filing benefit reductions imposed by Social Security by working until your NRA. At the same time, you can keep contributing to your retirement-savings plan, building additional balances that can be put to work in the market. And every additional year of working income is a year in which you’re not supporting yourself by drawing down retirement balances. The upshot is that staying on the job a few additional years can boost your income in retirement by one-third or more.

4. Playing the dinosaur. Keeping or finding a job is challenging for anyone in tough economic times, but it’s harder if you’re over age 50--a reality that is colliding with older workers’ need to stick around. Many older workers haven’t kept their technology skills current or are too intent on replicating their last job, rather than being open to new career pathways.

5. Inadequate saving. The average U.S. household has managed to save just $60,000 toward retirement. The average contribution to a workplace saving plan is 7.5 percent of salary--about half the rate recommended by most financial planning experts.

6. Too much risk. Our exposure to stocks is too great as retirement approaches. Nearly one in four investors approaching retirement age (56 to 65) had more than 90 percent of their account balances in equities at the end of 2007. That’s far too high, and older investors suffered huge losses when the market crashed in 2008.

7. Premature cash-outs. About 45 percent of workplace retirement plan participants cash out their 401(k) balances when they change jobs rather than roll them over to new employers or IRAs. That disrupts the long-term growth of their assets. Also, borrowing and hardship withdrawals are allowed under the rules, and people have been tapping into their balances somewhat more frequently during the recession.

8. Ignoring annuities. Americans without traditional pensions face the challenge of meeting retirement expenses with a combination of Social Security and savings. But one overlooked option is purchasing a do-it-yourself pension - otherwise known as an income annuity. Income annuities haven’t gained widespread popularity as financial tools for retirement planning, mainly because people dislike losing control of their assets and worry that they won’t “make back” the large sum of money that must be invested upfront. However, when used properly, an income annuity is an effective tool for covering basic living expenses and can provide effective insurance against the risk of out-living your money.

9. Gambling on health expense risk. Even for those on Medicare, health-care costs are eroding spending power and economic security; out-of-pocket expenses for people in retirement have jumped 50 percent since 2002--and that doesn’t include the possible need for long-term care insurance. Health-care costs pose one of the most serious risks to retirement security, so it’s important to understand how to plan for this major expense, navigate the system and manage your spending.

10. Ignoring advice. Even before the economic crash, the boomer retirement knowledge gap was large, and the need for smart planning has only become more acute in hard times. Do-it-yourself planning certainly is an option, but a little help from a professional advisor can be well worth the time and money. The rationale for hiring a trustworthy advisor is simple: Money spent now could make a big difference in helping you achieve a secure, happy future retirement. I recommend getting a fee-only advisor whose counsel won’t be swayed by the need to earn commissions or loyalties to any particular financial product.

SecondAct contributor Mark Miller is the author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living (Bloomberg Press/John Wiley Sons).
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