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4 retirement mistakes to avoid

By Barbara Whelehan · Bankrate.com
Friday, October 12, 2012
Posted: 4 pm ET

It's rare to get positive news about retirement because the retirement industry tends to generate tons of dire reports about how inadequately prepared Americans are for retirement. But this week, the Plan Sponsor Council of America released its 55th annual survey of profit sharing and 401(k) plans, and its findings are mostly upbeat.

The survey of 840 plans representing 10.3 million plan participants and $753 billion of assets reports on the 2011 plan year. Here are some of the results.

  • Contributions are up by both employers and their workers. In plans that allow matching contributions, 95.5 percent of companies offer them, up from 91 percent in 2010.
  • Eight out of 10 workers (79.5 percent) are taking advantage of their workplace retirement plans, up from 76.9 percent in 2010.
  • The average company match increased to 4.1 percent of pay from 3.7 percent in 2010.
  • Plan participants' average contributions edged up from 6.2 percent to 6.4 percent.
  • Automatic enrollment is offered by 45.9 percent of plans, up from 41.8 percent. But the best news here is that the default deferral rate is greater than 3 percent in roughly one-third of plans, up from 25.8 percent in 2010.
  • Nearly half of employers (49 percent) offer after-tax Roth plans, which provide a lot more flexibility for tax planning in retirement. However, only 17.4 percent of employees take advantage of them.

OK, so we can revel in this good news for a few minutes, but let's not fall into complacency. There's a lot of room for improvement here. Why aren't 100 percent of employees taking advantage of their plans? Why do they only contribute 6.4 percent on average instead of 10 percent or 15 percent? And why aren't more people taking advantage of their Roth 401(k) plan? Bankrate's story on taking tax-savvy retirement plan distributions shows how having investments with different tax characteristics can help make your money last longer during retirement.

So while we can pat ourselves on the back for making good progress, let's see how we can improve. In her October newsletter, Certified Financial Planner professional Leslie Corcoran, founder of Family First Financial Planning in Stuart, Fla., describes four retirement planning mistakes and how to avoid them. Here's a distilled version with my two cents thrown in.

Don't procrastinate. You can accumulate a much larger nest egg if you start in your 20s than if you wait until you're 45 to begin saving money. Younger folks can accumulate five times' what a 45-year-old can if they start early. For some of us, it's too late. But tell young people not to wait until other financial goals are met before starting to save. This is so important.

Don't underestimate your retirement income needs. Start thinking now about how much you currently spend, and what your needs will be when you stop working.

Don't ignore workplace retirement plans. Take full advantage of a company match and try to maximize your contributions, whether to a traditional or Roth 401(k) -- preferably both!

Don't invest too conservatively. While preserving principal is important for those approaching retirement, you risk losing your purchasing power by not getting any growth. "On the other hand, if you invest too heavily in growth investments, your risk is heightened," Corcoran warns.

Try to strike a balance between growth and safety, she says, and if you're stuck, seek the help of a financial planner who places your interests above his or her own.

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Follow me on Twitter: BWhelehan.

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