Bucko Bucks: Retirement Savings

Despite the endless drumbeat of advice to "save, save, save for retirement," most Americans are saying "tomorrow, tomorrow, tomorrow." Then tomorrow turns into today, and more immediate priorities keep pushing long-term planning off into the future.

In the latest Employment Benefit Research Institute survey, 56 percent of workers reported that the total value of their household's savings and investments, excluding the value of their primary home and any defined benefit plans, was less than $25,000, and about 29 percent said they have less than $1,000. Those numbers are hardly enough to fund even the most modest of retirement dreams.

Truth is, with savings so slim, there's precious little room for error when planning for retirement, because people's nest eggs aren't much of a safety net. But failing to save enough is just one of many mistakes people make when planning for the twilight years. There are a host of retirement planning missteps that can make an already less-than-ideal situation even worse. 

Here's a look at where people commonly go wrong, and how they can adjust course to reach retirement in good financial shape. 

1. Rethink Retirement

"The retirement message doesn't work. Most people don't have the willpower or the financial ability to forgo spending today for a hazy benefit tomorrow," says Sol Nasisi, chief economist at www.BestCashCow.com, which provides information on banks and credit unions. "Instead, people should think about building personal wealth, a process that it is ongoing and has immediate benefits, but also provides for people when they decide to stop working. Building and accumulating wealth is a much more powerful, immediate message than saving for retirement.

Changing the message changes how one thinks about saving and investing. "Building wealth is a much more active process than saving for retirement, and its benefits can be realized much quicker," Nasisi adds. While this may seem top be just a shift of semantics, "Building wealth is largely a matter of outlook and philosophy. Saving for retirement is a chore, building wealth is a challenge," he says.

Also, forget about the idea of retirement as a permanent vacation.

"The old idea of retire at 65, move somewhere warm, play golf, no longer works," points out Matthew Tuttle, a certified financial planner with Tuttle Wealth Management. "With life expectancies increasing, playing golf and going to early bird dinners every day can get old [after] 35 years. Rethink what retirement means: It could be working fewer hours or changing jobs to something you like more."

Know too, that you may not have as much control over your retirement date as you imagine. "Most people assume they will retire at a certain age, but two in five people retire earlier than planned," warns Katie Libbe, vice president of consumer insights at Allianz Life. "This could be due to layoffs, illness, or any number of factors. The key is to start saving early."

2. Anticipate the Unexpected

When you're young and healthy, you'll spend very little time in the doctor's office, but for most of us, that will change later in life. According to a Fidelity Investments study, a 65-year-old couple who retired in 2010 will need $250,000 to pay for medical expenses throughout retirement, not including nursing-home care. The study found that health care costs average $535 a month, or about one-fifth of an average couple's total monthly expenses of $2,842.

Failing to prepare for the reality that eventually, your young bones will be old is a critical mistake. "Medicare is not free and it doesn't cover everything, including prescription drugs," says Ross Blair, CEO of www.PlanPrescriber.com. "Not planning ahead in retirement for catastrophic medical expenses as well as prescription drug costs and supplemental insurance plans could potentially be devastating to a retiree."

The good news is, there are some tax-free ways to compensate for those expenses. You can contribute to a Health Savings Account. Individuals can contribute $3,050 in 2011, while a family can contribute $6,150 a year tax free. If you're over 55, you can add an extra $1,000 as a catch-up contribution. "When someone turns 65 and ages into Medicare they can use these funds for prescription drugs, certain Medicare plans and other health coverage other than premiums for a Medicare supplement policy, such as Medigap," says Blair. Proper protection is key, be it health, disability, life, or long term care insurance. 

3. Forget Tradition 

Conventional wisdom may not apply to you. "Following standard industry advice that you should get real conservative, meaning investing heavily in bonds, by the time you are 65 is a recipe for having to find a job in your 70s and 80s when you run out of money," says Tuttle.

Likewise, you shouldn't count on history repeating itself. "You can't assume you'll always get the same return on your investments," cautions David Spader, a financial analyst with www.SavingsAccount.org, which provides information on savings, money market and CD rates. "Don't think you'll be able to beat the market for 30 years."

4. Handle Your 401(k) Wisely 

A 401(k) is not a piggy bank. Sure, it's your money, and good for you for participating in your employer's plan -- a surprising number of people don't even do that, believing that they can't afford to. Hopefully, you're contributing enough to get the maximum amount of free money from the company's match, if yours offers it. But borrowing from yourself is a bad idea.

"Taking a loan from a retirement plan can look appealing as a way to get out of a hole, but it can actually create more problems," says Scott Halliwell, a certified financial planner with USAA. "This tactic removes the growth potential on those funds, and, if you lose your job and can't repay the funds, the loan will be treated as a distribution and subject to taxes and penalties." 

While it may be convenient, think twice about leaving retirement funds in an employer plan after you leave that job. "The employer plan has limited investment options. The employer makes all the decisions. As soon as possible, most people should roll their employer retirement funds into an IRA," advises Radon Stancil, a certified financial planner with Diversified Estate Services. You can do this tax-free and once the funds are in an IRA, you the owner, have all the control. 

5. Redefine Investing 

Investing has increasingly become synonymous with putting money in stocks, bonds or mutual funds. While this should be one facet of building wealth, it should not be the only investment vehicle, nor should it necessarily be the primary investment vehicle, says Nasisi. To be truly diversified, an investor should look to real estate, an investment in a business, or starting a side business, he adds. 

"Take the initiative and invest some money in yourself and things you can control instead of forking over all your savings to others," says Nasisi. "Look for ways to build income streams that will generate reliable cash well into the future." 

6. Set Priorities
You have to put your hard earned money in the right places. "Forget the shiny new BMW or the latest iPhone, save the money and put it to work for you," says Nasisi. While it's a very admirable goal to save money for your children's college education, truth is, there are many ways to pay for college. "But go into the bank on the day you retire and ask to take out a 'retirement loan," says Charlie Long, a financial adviser with Exemplar Financial Network. You get the point.

It can also be a mistake, especially in this low-interest-rate environment, says Long, to pay off a low-interest mortgage, when those funds could be used elsewhere. 

Realize that when it comes to retirement you can't "wing it." Stephen Cunha, a certified financial planner with Baystate Financial Services says to remember the five P's: Prior Planning Prevents Poor Performance. You want a written plan that includes an analysis of all financial goals, retirement income needs, insurance, tax, investment and an estate plan, he adds. However, your plan can't be engraved in stone, and should be monitored periodically. You need some tangible evidence of what you want and why, and and idea of how you plan to achieve it -- otherwise, how can you expect to reach your goals? 


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