How to avoid these 9 common retirement pitfalls

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This article is reprinted by permission

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

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

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 theyll 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 ofmarket volatilityrecently 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. Its easy to overreact to market volatility. But pulling your money out of the market because of a downturn will cost you.

See: What bitcoins collapse could mean for your retirement

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.

Read: How to have substantially more money when you retire without saving even one additional dollar

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 mind-set about your retirement investment vehicles also means you will miss out on growth. Make sure you regularlyrebalance your portfolioto 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.

If you wind up retiring at the bottom of a market downturn, youll 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 its a particularly disastrous mistake if youre 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.

See: Jack Bogles ghost warns about 401(k)s

Retirement pitfall No. 6: Taking money from your retirement plan prior to age 59

Whether you are planning to retire in your 50s 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), youre generally going to have to wave goodbye to a major chunk of your money if you pull out cash early.

The rules forearly distributions of tax-deferred accountsare very clear: If you take your money early, youll 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.

Retirement pitfall No. 7: Carrying debt into retirement

Entering your retirement with debthanging 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?

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 Securityearly 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.

Its easy to see why retirees are such tempting targets forscammers; 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 Birkenis 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.

This article is reprinted by permission, 2021 Twin Cities Public Television, Inc. All rights reserved.

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