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3 mistakes in saving for retirement -- and how to avoid them

October 20, 2010

by Russell Dunkin | MoneyRates Guest Contributor


This article is part of a MoneyRates.com series, 10 steps to a comfortable retirement.

These days you're inundated at every turn with information about retirement. Whether it's on TV, online or at work, there are no shortage of messages and "advice" on what you should or shouldn't be doing about your future.

How do you make sense of it all, especially if you have a short window left before you retire? What should you do to target a comfortable retirement?

Most importantly, what are some common mistakes and impulses when building your retirement savings, and how can you avoid these mistakes?

Mistake #1: Shooting for the mythical round number. Many investors focus on a mystical amount that will make retirement work. It's usually a round number, say $500,000 or $1,000,000.

This number doesn't exist.

The number you need to know is what you spend each month -- not what you make today, but what you spend on things that will continue in retirement. Many have trouble pinpointing this number. Use a tool like Mint.com to track your monthly cash flow and find the answer.

After subtracting Social Security, you'll know how much extra will need to come from your retirement savings. Many experts believe a 4 percent withdrawal rate from a balanced portfolio is sustainable throughout your retirement. For example, if you have $500,000 saved, you could begin drawing $20,000 a year from the accounts and adjust it higher each year for inflation. Are you on pace to maintain your spending based on this figure?

Now that you know what to target, you can focus on ways of achieving the real number you need.

Mistake #2: Getting distracted by the noise. In the age of information, there is no shortage of tips or advice on what you should be doing. Problem is, none of it is based on your needs or your retirement plan.

Think about the last 12 months. We've had the H1N1 scare, end of the recession, crisis in Greece and an oil well explosion. Each time felt like a bad time to be invested in stocks. However, had you panicked during any of these moments, your portfolio would likely be worth less today than it is. Ignore the noise, and make decisions based on your needs.

Mistake #3: Worrying about factors out of your control. Once you learn to ignore the noise, you can focus on what you can control. The direction of the market or what tax rates will be in 2011 are out of your control. You can control many things that have a meaningful impact on your life in retirement.

Having taken control of your cash flow in step one, you can make decisions on your spending and saving. If you're overspending in one area, find ways to reduce that spending and redirect it into your 401(k).

Take a close look at what your advisor or broker charges and the costs of each investment and make changes that are in your best interest.

Beyond spending, you can control when you retire. Each year you delay retirement means another year of saving, one less year of spending, and fewer penalties on taking Social Security early.

I hope you will take this advice during National Save for Retirement Week as you plan for a successful and relaxing retirement.

Read more financial advice from our series, 10 steps to a comfortable retirement.


About the Author:

Russell W. Dunkin, a Certified Financial PlannerTM and wealth advisor with McKinley Carter in Wheeling, W.Va., has worked in the financial services industry since 1998. Prior to joining McKinley Carter, he worked as an investment counselor for one the largest financial holding companies in the United States.

Mr. Dunkin attended Capital University, in Columbus, Ohio, where he received a degree in Economics with minors in Finance and Political Science. He has also successfully completed the Certified Financial Planning Professional Program.

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