7 Retirement Mistakes to Avoid

This is a contribution by Dominique Brown. Read more about him in his bio after this post. All statements in this article are Dom’s opinions and do not constitute financial advice. See your financial advisor.

Retirement is something that I am looking forward to. In fact, I’ve been thinking about retiring since I was 9 years old. No lie. In my mind I have it all figured out. What’s better than having all the time in the world to do what you want, travel where you want, and basically lounge around if you want? Imagine you wake up, brush your teeth and go commando under your favorite color snuggie… all day!

Dreaming about retirement can be really exciting at first, that is until you realize that 1) retirement is forever away and 2) you still don’t have enough money in your account to last you through the years. Suddenly, the Caribbean cruises and going commando under a snuggie turns into nightmares of food stamps and nursing homes…

Before this becomes my reality I figured it was best to watch out for retirement blunders. I got to thinking… I had a conversation with myself and said “hmm… What do we need to look out for?” Then I wrote the following list.

Mistake #1: Investing Too Late

What most people don’t understand is the value of investing early. I didn’t figure this one out until I turned 24 when I started to learn about time value of money and compound interest. Time is the biggest ally that anyone can have when it comes to growing money.

The concept of compounded interest explains exponential growth for every year your money is invested. Isn’t that awesome! I came across a chart that showed a young guy that invested from age 20 to age 30 compared to a person who invested from age 30 to age 50. The young guy won out! Invest while you are young. We personally max out our 401ks and invest in real estate.

Mistake #2: Taking a Loan on Your Retirement Account

Let’s be real here. A retirement account is not a savings account. Retirement is for retirement only. I will never take money out of my retirement accounts. What if it’s an emergency Dom? That’s what emergency funds are for my dear! We live on 50% of our income so if something bad happens we can just adjust savings down. You should never borrow from your own retirement savings. This greatly impairs the earning ability of your money.

I don’t care if you can pay the interest or you have an hot investment idea that needs seed money. Raiding your retirement accounts is a no no.

Mistake #3: Putting All of Your Eggs in One Basket

Truth be told I know for a fact that 90% of my gains are going to come from proper asset allocation. I used to attend investing seminars and listen to financial gurus all the time. The one thing that they always advise is to diversify. I’ve learned that putting your eggs in one basket could work two ways. You can make a killing or you can lose your shirt.

A lot of times people make a killing but are too late when it comes to realizing that the economic cycle has changed. They end up on the losing end. For example, if the fed lowers interests rates certain securities start to give some impressive returns. When the interest rates go back up those same securities will start giving those gains back. If you don’t allocate your portfolio properly or rebalance timely… Boom! You’ll be on the losing end.

Mistake #4: Cashing Out

::Sings:: I got a condo on my wrist girl, I’m cashing out. I live in the D.C. area and I learned that there is a slim chance that I will stay with my current employer for the rest of my natural life. However, when I do decide to leave my current employer or get fired because I’m too awesome (that’s the only reason I’ll get fired) I won’t be cashing out my 401k. In fact, I don’t really have to worry about this one because I don’t invest in my company 401k. (Gasp!)

My employer doesn’t match my 401k contributions and the investment options suck. He opted to go for rock star healthcare plan and paying us a lot of money and I love him for that decision. However, if I did have a 401k or if my wife left her company we will not cash the 401k out.

Why? Well Uncle Sam loves early withdrawls and he will tax them like nobody’s business. I’m not up for giving Uncle Sam 10% of my money as a penalty in addition to paying my marginal tax rate (33%) on the income. Getting taxed to take money out of your 401k early is overrated! I would roll it to a IRA or to my new company’s 401k instead.

Mistake #5: Counting on Social Security

I have pretty much counted social security out. Politicians always talk about taking it away with every election. I’m going to call it icing on the cake if we end up getting any social security. It’s better to just save on our own, since social security doesn’t give much security anyway. I’m a fan of saving for my own retirement and not relying on the government to fund it for me.

Mistake #6: Not Having A Retirement Number

I love that investment company’s commercial “What’s your number” where the guy just randomly shouts out numbers. It made me realize I needed to know my number. Our number happens to be $1.6 million. This will allow us to live on $6,000 per month adjusted for inflation (3%).

As long as we average 8% per year we will be good for 30 years. Just blindly saving isn’t the best way to plan for a bright retirement future. If you don’t establish a budget, you might end up outliving your retirement savings and having to call upon your children or other relatives to support you. I don’t plan on calling on my little girl to help me out in retirement. That’s a parenting FAIL!

Mistake #7: Living Too Long

This might sound harsh but the real reality of this is when you underestimate your how long you may live. Right now we plan to live until 90. I figure if we make it to 90 and run out of money I’ll be old and I’ll live the rest of my life on government handouts. Yes this is a contradiction but at least I’ve successfully planned until 90. Give me a break! Having more is certainly better than having less. I might have to rethink our plans of living until 90 and add 10 more years to it and I’ll have to re-run my numbers.

Retirement planning is very very important. You can’t finance retirement, so take responsibility for it now. There is such thing as saving for retirement too late. Planning for your future can mean the difference between being happy and being miserable. Do like I strive to do and avoid these 7 retirement mistakes!

Do me a favor! Leave a comment below telling me how you plan to avoid these 7 retirement mistakes. Be as specific as possible.

Dominique Brown is a financial planner, landlord, personal finance blogger and video blogger. He is the owner of YourFinancesSimplified and InsiderRealEstateTips where he talks about everything from being a new father to his worst financial mistakes.

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  1. Ouch you are right #7 is a little harsh! I think people should have enough saved up so that they can live until they are 90 or so. I have some relatives that lived to 95 and they were fine financially. They lived frugal in their retirement, which I think is key if you end up living much longer than the average lifespan.

  2. Great post Dominique! I always like to add that I don’t think diversifying in just the stock market necessarily means diversified. Not only should your securities investments be diversified, but I think you should diversify your holdings in other things as well – like real estate for instance. Thanks again for the great tips!

  3. We’ve both had relatives live past 90, too! I think we’ll try and plan for hanging around a bit longer than 90. =)

  4. I’d say a mistake would be not paying off your debt prior to retiring. If you eliminate the mortgage payment, that’s that much less money you’ll need every month.

  5. Taht last one made me laugh! LIving too long. Ha! Thanks, I’ll see what I can do about that one. 🙂

  6. Great post. I love your statement that you can’t finance retirement. I couldn’t agree more. A main key is having a plan, educating yourself, and sticking to it. Be as diversified as you can without being overdiversified. Think of things outside the stock market and be committed to your plans. Getting to retirement means taking your choices seriously and having a long term view of things.

  7. I am always concerned about living longer than my investments. I plan on withdrawing at a 3% rate to fit with a 20+ year life expectancy. This is really conservative since I will be 70 when I retire (again).

  8. I completely agree with you on all of these Dominique. Biggest two in my mind are starting too late and borrowing from the retirement account.

    It is never to soon to start thinking about retirement. I opened my IRA as soon as I got my first job out of college.

  9. Great tips, Dom! The major mistakes that clients tell me they regret are: not starting earlier and not saving more. It’s important to get started early, even if you can’t save a lot. My mom (who was single most of her life) was able to raise my bro and I while making around $35-40k a year. Well…she’ll get very close to retiring as a millionaire simply because she started saving early, saved continuously, and never cashed out.

  10. Jason Clayton | frugal habits says:

    Very good List and I would add “not getting out of debt by the time you retire”…

    Although I differ on #2. Taking a loan from your 401k is borrowing your own money. The interest you pay is also paid back to your 401k account, so you are actually still earning money on the amount in your 401k as you pay it back (albeit it is your money). The difference is if you instead get a loan from the bank, the interest goes to the bank instead of you. In many ways a 401k loan is a low risk investment, as you are moving the investment to yourself as the interest is in your additional payment. This isn’t a bad option if you are in need of a loan, IMO, as long as it is a small part of your 401k amount and the term is low.

  11. Dangit, now that “cashin’ out” song is stuck in my head! But you know, precious jewels are pulling in decent returns right now, so maybe cashing out and investing in rental real estate might not be a bad idea for the rapper….but he might need to change his name from “Cash Out” to “Passive “Income”, though I’m not sure how his PR rep would take it…

    Anyway, I’m with you on this one. I put away $10,000 in a Roth IRA by the time I was 18, and have a 401k at work putting some money away. Starting early is so important, though I have had to put a halt on the Roth IRA contributions until my income raises a bit.

    • hahaha.. you now have the worst song ever stuck in your head.. well maybe the Future, turn out the lights song is worse. Great job on the Roth and 401k are you investing in other means outside the stock market?

  12. Awesome post! I’m a new reader and this is all a lot to think about! I am planning for retirement but I think I’m a little behind the ball. My grandparents are right now dealing with #7. My grandmother is 92 and grandfather is 88 and they are starting to worry because they really didn’t anticipate living this long. We’re glad they did though! 🙂

  13. Veronica @ Pelican on Money says:

    Dominique, I’ve recently started saving so I hope I’m not too deep into “not starting early enough.” As for trusting politicians on keeping social security around – Na-a. Nope! I’ll make my own plan that doesn’t involve bickering over what to cut while we spend all this money on military.

    • No need to hope.. sit down and figure out your retirement needs / number. Then start putting in the needed amount. No need to go into retirement blindly. What’s your retirement number? Can you realistically hit it?

  14. Ornella @ Moneylicious says:

    Cashing out is huge…great point to make. I think all too often people may not realize the ramifications–taxes and penalties.

  15. I think investing too late (or too little early on) is a common mistake. Deferral of instant gratification is a problem many Americans have. It’s tough to think 40 years out and sacrifice a few hundred bucks a month, but looking back now and what I’ve accumulated in my 401k and IRAs, I’m sure glad I did!

    • I couldn’t agree with you more. The way I see it, I’m savings for my future self and my future generations. Now that I have a child on the way, it put it in perspective for me. It’s not about me, it’s about the future.. So, I have to plan accordingly.

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