3 mistakes that ruin retirement

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Ensuring a secure retirement is tricky enough as it is. But there are certain actions you can take that could make achieving financial security even more challenging. Here are three mistakes that retirement planning experts say to avoid.

Mistake 1: Reinvesting your Social Security benefits. Believing that taking Social Security early and investing what you get will put you ahead is a losing strategy. William Meyer, founder and CEO of Social Security Solutions, a consultancy, says that might have worked when interest rates were soaring, but it doesn’t work in today’s low-interest-rate environment. “It’s a sad fact that too many Social Security recipients fall victim to the siren song of reinvesting their benefits,” he says.

Here’s why it is an unsuccessful strategy. Delaying taking Social Security is like buying an inflation-linked lifetime annuity, Meyer says. He offers this example: If you are eligible for $1,000 a month in Social Security at your full retirement age of 66, but you choose to take Social Security early at 62, you will get 25 percent less — $750. Every year you put off taking Social Security from 62 to 66, you get about 6 percent more. So if at 62 you delay benefits for a year, it would be the equivalent of paying $750 a month for 12 months to earn an additional $50 of benefits each month for the rest of your life. In today’s world of low-paying safe investments, this is a good deal.

The deal gets even better once you reach 66 without claiming. If you delay taking benefits until you are a boomer’s full retirement age, you would in effect pay $750 a month for 48 months in return for an additional $250 a month — or 32 percent — for the rest of your life. Meyer points out that any investment that you might make today is unlikely to offer anywhere near this kind of guaranteed return. While you might make 8 percent a year in the stock market, the likelihood that you will make that 8 percent for four straight years is slim — plus there will be taxes and investment fees. Meanwhile, by delaying Social Security, you’ll not only earn about 8 percent a year, you’ll also get a cost-of-living adjustment, which this year is an additional 1.7 percent — for a total annual pay off for waiting of 9.7 percent.

“It would take quite an effort in either a private sector annuity or the (much riskier) stock market to account for the guaranteed lifetime annuitization inherent in Social Security,” Meyer says. “Bottom line: it pays to delay. If the recipient expects to have a long life span, Social Security provides for a great rate of return,” Meyer says.

Mistake 2: Failing to make saving a priority. Some 40 percent of investors with $10,000 or more in an online brokerage account told E-Trade Financial saving for retirement is difficult because they would rather spend the money today. These investors said they planned to set aside just 28 percent of their year-end bonuses for retirement. Failing to take advantage of good opportunities to save means many of us will come up short in retirement. “Making disciplined contributions is the key to success — and may be the most significant factor in the health of your retirement account,” says Lena Haas, a senior vice president of retirement, investing and saving for E-Trade.

Mistake 3: Giving up an old-fashioned defined benefit pension plan. According to the National Institute on Retirement Security, it requires 91 percent more money to achieve the same level of retirement income with a defined contribution plan like a 401(k) than a company has to spend when it offers the typical old-fashioned defined benefit pension plan. Jobs with pensions are getting scarce, but they are still out there. If you have a choice between a job with a pension and a job without, think twice before you turn your back on the one that offers you the luxury of a lifetime of steady income.

Here are seven Social Security benefits that many people overlook.