Archive for August, 2006

by Eric Heckman

Ah, the good old days! Remember when workers could depend on their employers’ pension plan to provide sufficient retirement income? What about when retirees could rely on a dependable Social Security system to make up for any shortfall?

The “golden days” of retirement plans occurred not too long ago. But today, a large portion of the burden for retirement savings has been placed on the individual. Instead of pensions, a majority of tomorrow’s retirees will rely on income from a combination of Individual Retirement Accounts (IRAs) and employer-sponsored plans such as a 401(k).

In my years as a financial professional, I have seen the changes and with that, I have come up with the five common mistakes that may shrink your retirement assets, as well as ways to avoid them.

Mistake no. 1: Taking Rollover Distributions Directly: When changing jobs, workers are sometimes tempted to cash in some or all of their retirement plan assets. This mistake can be costly for many reasons, but mainly because you may pay income taxes on your pre-tax contributions. You may avoid this common pitfall by transferring the assets into a traditional IRA or another eligible retirement plan.

Mistake no. 2: Not Contributing Enough: A number of companies match employee contributions of up to 6 percent of the employee’s annual salary. As a result, many employees only contribute that amount to their employer-sponsored retirement plan. Contributing the maximum can be an excellent way to help ensure your retirement future.

Mistake no. 3: Failing to Capitalize on Catch-Up Provisions: Those age 50 or beyond, can take advantage of so-called “catch-up” provisions. If you’re nearing retirement, these provisions may provide a smart way to boost your asset base.

Mistake no. 4: Taking Too Much in IRA Distributions: At age 70, the IRS requires you to begin taking distributions from your IRA. But, the IRS considers taking distributions too slowly just as big a mistake as taking them too early. The penalty for withdrawing too little can be severe, with penalties and income taxes adding up to as much as 75 percent on the amount that is not distributed as required.

Mistake no. 5: Disorganization: According to the U.S. Department of Labor, it is estimated that the average person will change jobs 10 times before retirement. If workers open a retirement account with each employer, they acquire a lot of paperwork to manage. Over time, some people lose track of their paperwork. If that employer loses track of your address, you may never see that money again.

I recommend making a checklist for your retirement planning. It should include what you plan to do with your 401(k), your IRA and your consolidation of existing accounts.