Five Common Retirement Mistakes, and How to Avoid Them

Looking forward to retiring someday? Who isn't? Whether you're in your twenties and working your way up the corporate ladder, or you're a 50-something on the home stretch of your career, you've probably dreamed of a day when you can kick back and enjoy some hard-earned downtime.

Sounds fantastic, sure. But there's a catch.

In order to retire, you've got to have a solid retirement plan. Problem is, most of us know we need retirement, and some of us even participate - halfheartedly - in our employers' retirement programs, like 401(k)s and the like. But we make mistakes. Big ones. From not enrolling in a 401(k) at all to cashing out when we move on and move up, these errors in judgment can add up to become serious problems when you're ready to retire.

Not sure if you're getting the most out of your retirement plan? Don't panic - no matter how old you are, there's still time to beef up your retirement. Unless, of course, you want to work forever. Read on for the five most common retirement mistakes - and what to do if you've made one.

1. Not enrolling in your company's 401(k) program. Okay, so this sounds like a no-brainer. But, a surprising amount of workers just don't enroll, period. This is especially true of younger workers - usually folks in their 20s and early 30s - who figure they've got plenty of time to think about retiring. It's hard to think long-term, especially if you've just entered the workforce. But, there's no time like the present. If you're not participating in your company's retirement program, you're really missing out, especially since most companies match a portion of your savings. Think about it: It's free money. I repeat: Free. Money.

Why would you turn that down? Your company-sponsored retirement program is your first step toward a secure retirement. Enroll as soon as possible, and you'll instantly get a leg up on your future financial situation.

And if you're already enrolled, keep reading . . .

2. Enrolling in your company's 401(k) - but not contributing enough. While it's true that enrolling is better than not enrolling, many workers don't take the next step: upping their contributions. Even if your company has automatic enrollment - which is becoming increasingly popular - most corporate retirement programs are set at a default rate of 3 percent of your income. Sure, it's better than nothing. But, when you consider that most financial experts recommend a contribution of at least 15 percent, it makes sense to be proactive and up your contribution to the maximum.

The best part? The more you contribute, the more your employer matches - up to a certain amount. So it's in your best interests to put away as much as possible. Plus, since 401(k) contributions aren't taxable, the more you save now, the less you'll wind up paying in state and federal income taxes. It's a sweet deal.

Not comfortable with the maximum? No worries. If 15 percent is too big of a hit at first, start slowly: Up your contributions gradually as your income increases. That way, you won't feel the pinch as much.

3. Putting too much stock in your company. Or anywhere else, for that matter. Maybe you're not a financial whiz. Maybe you don't know a stock from a bond - you just know that your money has to go . . . well, somewhere. It's tempting to simply stick your retirement dollars into company stock options and hope for the best, but the results can be disastrous if your company goes belly up. Enron, anyone? Ditto for putting all your money into stocks. Or bonds.

You're much better off with a balanced retirement portfolio comprised of a variety of investment vehicles. Most financial experts agree that a solid, moderate investment portfolio should be diversified - for example, depending on your age and your investment goals, you might choose a combination of stocks and bonds. And don't invest everything in company stock. Putting all of your eggs in one basket is just too risky.

The good news is many companies offer services like free financial advice and professional retirement management to make sure you're getting the most for your retirement dollar. If you're not sure about your 401(k), schedule an appointment and find out what your money is doing.

4. Borrowing from your retirement funds. Big mistake. Huge. Some people think that borrowing from their 401(k) is a better option than taking out a bank loan - after all, it's their money, right? Yes and no. Technically, it is your money. But, it's still a loan. And you still have to pay it back - there's no getting around that. At best, you're simply stealing from yourself, with interest. At worst, think about what would happen if you get laid off: Now, you're not just unemployed, you're in debt.

If you're tempted to borrow from your retirement, take a long, hard look at your reasons: If you're doing it to pay down your credit card debt, for example, you may want to change your spending habits before you borrow money - from anyone.

5. Moving on and cashing out. They say that most of us will change careers or companies several times during our working years, from switching fields entirely to moving to different positions in different companies. So, what do you do with your 401(k) when you've just scored a new job at a bigger company, along with a fatter paycheck and better benefits?

You have a few options. But don't - under any circumstances - cash it out.

Like mistake #1, younger workers are most prone to cash out their 401(k) when they change companies. But, by the time you're finished paying penalties and taxes, you'll be lucky to get half of what you worked so hard to put away. Instead of cashing out, you should leave it alone or roll it over to your new company's 401(k) - or, if your new company doesn't offer a 401(k), roll it into an IRA - any of those are good, common-sense options. But fight the urge to take the money and run. In the end, you're simply draining your future funds.

If you're guilty of some of these mistakes, you're not alone: Many workers don't quite have a handle on their retirement. But remember, it's never too late to turn things around and start saving. If you have a 401(k), think about stepping up your contributions or diversifying; if you don't have one, now's the time to start.

Here's to a happy (and early) retirement!

Michael G. Peterson co-founded American Credit Foundation, a non-profit credit counseling organization. Visit debtguru.com for more information and financial resources.

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