An affordable retirement is a goal for many people. However, there are pitfalls that can make this goal seem more like a dream than reality. Here are some mistakes to avoid:

1. Taking out retirement money. According to a study by Hewitt Associates, 45% of employees who switch their jobs cash in their 401(k). In doing so, they end up paying income taxes plus a 10% penalty if they have not reached age 59 ½.

2. As obvious as it sounds, it is always a benefit to save for retirement. Unfortunately, this is what spenders tend to forget. Is buying that boat right now worth taking a chunk out of what could be put into retirement? Travel now or wait a few years? The choice is less about forgoing something than about when to consume. Just remember that spending now means spending less in the future.

3. Not having a financial plan. The 2008 Retirement Confidence Survey by the Employee Benefits Research Institute shows that only 47% of workers know how much they need to save for retirement. For the rest, well, there are many financial planners available to determine how big your nest egg should be.

4. After getting to retirement (congratulations!), there is an issue called financial sustainability. How much can you spend without outliving your savings? The typical rate is 4% per year. Depending on when you retire – during a bullish or bearish market – you will need to adjust your spending rate.

5. Asset allocation – or lack thereof. Owning too much of one stock, being swayed by emotions, thinking short-term instead of long-term, and a dozen other reasons can bruise your retirement. Diversifying your assets through a mix of stocks, bonds, and mutual funds is a good way to balance your portfolio. If one asset type does poorly, it can be offset by other portfolio activity.

6. Taxes. Knowing the rules of the game can divert more money into your retirement and less into taxes. For instance, profits from stocks held for at least a year are subject to a maximum tax rate of 15%. Interest from corporate bonds, however, can be taxed at 35%. Ironically, many investors put their stocks into tax-advantaged accounts and their bonds into regular, taxable accounts, when doing the reverse makes more sense.

7. Don’t pay more than you need to for financial advice. It’s one thing to invest in a broker who can give you a great return; it’s another to throw money away for common index fund advice, as is typically the case. If you’re considering a mutual fund, you can save a bundle by controlling your own investments instead of hiring someone to manage your money.

8. Retiring too soon. While retiring now seems like a great idea, many retirees find themselves bored pretty quickly. Furthermore, they may have another twenty years left to do, well, something they haven’t planned for. Rather than deciding to retire permanently, try taking temporary breaks from work. A couple months off can help you gauge your readiness for retirement.

Author: Mary Wu

Source: DCG Corp.