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9 Pitfalls That Can Derail Your Retirement

The author of 'The 5 Years Before You Retire' shares tips to avoid them

By Emily Guy Birken

There are a number of common pitfalls that can derail a retirement plan. In this article, I'll discuss nine of the most common ways pre-retirees and retirees can stumble in the path to retirement and how to avoid them.

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Everyone may make mistakes, but knowing how to avoid these pitfalls can keep you from jeopardizing the retirement you want and deserve.

It's easy to overreact to market volatility. But pulling your money out of the market because of a downturn will cost you.

Retirement Pitfall No. 1: Relying on Factors Outside of Your Control

While you might roll your eyes at someone who talks dreamily of the day their ship will come in and what they'll do with all that imaginary wealth, near-retirees will often make the exact same mistake. They will make their plans for retirement contingent on things they cannot control, including counting on a particular return on their investment or expecting to inherit money from a wealthy relative.

Every individual who plans to retire needs to recognize that he or she can only count on their own actions. Markets are volatile, promises can be reneged and nothing is guaranteed. But you have complete control over your money and your plans, and you can change both as needed.

Retirement Pitfall No. 2: Overreacting to Market Volatility

As I write this, the market has been on a long, strange trip in reaction to COVID-19 and its attendant changes to our society. While the frightening and sudden market downturns of February and March of 2020 have rebounded, the roller coaster ride of market volatility recently has often been scarier than anything in a Jordan Peele horror film ("Get Out" or "Us").

Feeling the urge to take the money and run is a perfectly natu­ral reaction to a sudden market downturn. It's easy to overreact to market volatility. But pulling your money out of the market because of a downturn will cost you.

The other side of the market overreaction coin is continuing to sit on investments that are going gangbusters in the hopes that they will keep going up and up. While it is always possible to liquidate investments before they reach their peak, the greater likelihood is that waiting will only result in losses.

Retirement Pitfall No. 3: Inactivity

After reading through the last pitfall, you may be thinking that the best thing to do when managing your investments is absolutely noth­ing. That will keep you from meddling with investments when they need time to grow.

However, having a set-it-and-forget-it mindset about your retirement investment vehicles also means you will miss out on growth. Make sure you regularly rebalance your portfolio to ensure that your asset allocation continues to reflect your goals and time horizon.

Retirement Pitfall No. 4: Retiring Without Your First Three Years of Income Set Aside

Rather than have all your savings tied up in long-term investments until the day you say sayonara to the office (virtual or otherwise), you should have the equivalent of one to three years' worth of living expenses set aside in short-term and conservative assets, like money-market funds or accounts and short-term bond funds.

Work to pay off your consumer debt prior to retirement.

If you wind up retiring at the bottom of a market downturn, you'll have built in enough of a cushion to allow your long-term assets to recover without having to sell them at a time that will cripple your nest egg for the rest of your retirement.

Retirement Pitfall No. 5: Taking a Loan From Your 401(k)

This is an enormous no-no at any time in your career, but it's a par­ticularly disastrous mistake if you're within five years of your retire­ment. Money removed from your 401(k) is money that cannot grow (with compound interest!), even if you are able to pay it back relatively quickly. The lost time equals lost growth, which you cannot afford to waste.

Retirement Pitfall No. 6: Taking Money From Your Retirement Plan Prior to Age 59 1/2

Whether you are planning to retire in your fifties or you feel as if you need to cash out your 401(k) or IRA before hitting the minimum age requirement to escape tax penalties on early withdrawals (59 ½), you're generally going to have to wave goodbye to a major chunk of your money if you pull out cash early.

The rules for early distri­butions of tax-deferred accounts are very clear: If you take your money early, you'll usually owe Uncle Sam 10% of your withdrawal plus regular income taxes. Consider your 401(k), 403(b) and IRA accounts off-limits until after you have retired and have reached a minimum of age 59 ½.

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Retirement Pitfall No. 7: Carrying Debt Into Retirement

Entering your retirement with debt hanging over your head means you are limiting how far your retirement income can go. And did you really save all these years just to send a big chunk of your retirement income to creditors?

Book cover of 'The 5 years Before You Retire' by Emily Guy Birken. Retirement pitfalls, retirement plan, Next Avenue

 Work to pay off your consumer debt prior to retirement.

Retirement Pitfall No. 8: Taking Social Security Too Early

Just because you can start receiving Social Security benefits at age 62 does not mean that you should. Taking Social Security early could reduce your benefit by as much as 30%.

Try to hold off on taking your Social Security retirement benefits until you have reached what Social Security calls your Full Retirement Age (between 66 and 67) or age 70.

Retirement Pitfall No. 9: Falling for Scams

Scamming retirees is a big business.

It's easy to see why retirees are such tempting tar­gets for scammers; they are often sitting on nest eggs they might not feel confident handling. Learn to feel comfortable asking your children or family members for advice and remember that asking lots of questions can help you avoid being scammed.

(Adapted from "The 5 Years Before You Retire, Updated Edition" by Emily Guy Birken. Copyright © 2014, 2021 by Simon & Schuster, Inc. Used with permission of the publisher, Adams Media, an imprint of Simon & Schuster. All rights reserved.)

Emily Guy Birken
Emily Guy Birken is an award-winning finance writer who specializes in personal finance. She is the author of "The 5 Years Before You Retire" and has written for Business Insider, Kiplinger, MSN Money, Forbes and The Washington Post online. Read More
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