Top 5 Retirement Planning Mistakes

It is never too soon to start putting away money for your retirement. Today, there are several options available, including IRAs and 401(k) plans, both of which are popular and help grow money for retirement tax-deferred. While most of us are aware of retirement plans, and in many cases have started saving money, there are several common mistakes that slow down the retirement planning and savings process. Here are the top 5.

1. Not taking advantage of time.

The earlier you start, the more your money will have time to grow in your retirement accounts. Too many people make the mistake of putting off starting a retirement savings plan.

2. Not investing regularly.

Many people start investing and then stop. If you do not invest on a regular basis, you cannot expect your retirement savings to grow.

3. Not taking full advantage of tax-free retirement accounts.

The more you put into tax-free retirement accounts, the more money you can grow tax-free. If you can afford to put in the maximum contribution to your retirement accounts each year, you should do so.

4. Poor asset allocation.

If you are investing too conservatively, you may not be able to build the amount you are hoping to have for your retirement years. Conversely, if you are getting close to retirement and are investing in high-risk investment vehicles, you may lose much of what you have worked so hard to save. How you allocate your assets is more important than what you select within a given asset class.

5. Not creating a post-retirement plan.

As you approach retirement you should determine how much money you will need and establish a plan for handling your money during your retirement years. This would include knowing all of your income sources, including investments, Social Security, and pensions.

Key retirement moves for the young

"A retirement account contribution of $5,000 today at age 23 will be worth nearly $3,00,000 when you retire at age 70, assuming a 9 per cent return," notes Bob Morrison, a financial planner in Denver.

The early start also is a very effective strategy if you're worried about how much you can set aside. Vanguard Investments tested scenarios and investment strategies for investors aged 25,35 and 45, aiming for a retirement age of 65.

The investor who starts at age 25 with a moderate investment allocation and contributes 6 per cent of salary will finish with 34 per cent more in her account than the same investor who starts at 35 — and 64 per cent more than an investor who starts at 45.

Put another way, the 35-year-old would need to boost her contribution rate to 9 per cent to achieve the same result as the 25-year-old starter who was saving 6 per cent.

Research by Aon Hewitt found that 43 per cent of workers in their 20s contribute to 401(k)s at rates too low to capture the full match, compared with 29 per cent of all workplace savers.

Business Line News papers , 5-feb-2012