By Shirley Pulawski
It's well-known that one of the biggest retirement mistakes people make is to fail to begin planning and saving until after reaching their 40s or 50s, but even with a good, solid retirement program well underway, there are important retirement mistakes to avoid once you're in your 50s. While approaching retirement, it's important to avoid bad habits and take steps to ensure you are maximizing your investments and will have a safe retirement, whether you have a 401(k) or IRA.
Revisit and re-evaluate your financial plans
A weekly or monthly allowance you may have thought would provide you with comfort and plenty 10 or 20 years ago may not be as realistic today. Take a good look at how much you've saved and how you plan to spend it, and for how long. Does your old plan suit your current lifestyle, and have you saved enough to meet those expectations? If not, start putting more into savings.
Max out your contributions
This should be a no-brainer: If you haven't already, now more than ever is the time to max out the amount you put into your retirement account. Do it.
Move stocks into conservative investments
It's time to move away from high-risk portfolios and into more conservative investment portfolios. While it may seem like a good idea to invest in higher-yield investments, the risk is too great if the investments take a dive, because in your 50s, you have less time to make the money back. Take a slow and steady approach as you prepare to take your retirement.
Evaluate your financial advisors
It's very important to have a trusted team of financial advisors and wealth management experts all throughout the years of making contributions to a retirement account, but especially so when it's this late in the game. Have a sit-down with your account managers, and visit with some competing teams. Be certain your advisors are committed and enthusiastic about your earning business and increasing the yield of your earnings.
Stay away from actively-managed funds
It might seem like a good idea to have someone actively making investment changes on a regular basis. The logic is they would be keeping up with market trends, but they also charge hefty fees. Those fees are better off being invested rather than spent.
Pay down debts
Don't end up at 65 with debt if you can avoid it. You can save a lot in the form of interest by getting accounts paid down, as no one wants to be bogged down with bills while taking the retirement vacation of their dreams.
Don't put more into a mortgage than into a tax-deferred retirement plan
It will take some number crunching, but it might not pay off to be over-zealous about paying off a mortgage before retirement if you are not maxed out on your annual contributions. It might seem logical to put an extra several hundred dollars per month toward paying off a mortgage. In 2011, The Street published a scenario in which an earner of about $100,000 a year in a tax bracket of 40 percent puts an extra $400 per month toward a $1,500 a month mortgage with a balance of $280,000. In this scenario, both the mortgage and investment interest rates were at 5 percent.
According to the author, the $400 earned after taxes is actually worth $550 if invested before taxes are taken out, so over a the term of a 30-year mortgage, you would have only paid off $62,000 toward the mortgage, but $550 an extra month stashed into a retirement account would yield $85,000.
Likewise, it may not make sense to refinance to a 15-year mortgage to have it paid by retirement if the potentially higher payment could be tax-deferred. Take a close look with your investment strategist to figure out if this is worthwhile or not.
Of course, all of this is assuming you can invest the $550 tax-free, which is not the case if you are already depositing the maximum amount into your retirement account. Ideally, you are in a situation where you can afford to both make the maximum contributions to your retirement investments and pay a bit extra on the mortgage.
Don't take out a new 30-year mortgage
This should seem obvious, but many people in their 50s still take out 30-year mortgages. Some do it with the idea that they will pay it off long before the retirement date, but will still end up paying a lot in interest. If there are solid reasons to refinance, take a hard look at the numbers -- both monthly and what is paid or saved over the long-term, and go for a 15-year mortgage if possible.
Don't ramp up your lifestyle
Sure, you're probably making more than ever before, have several safety nets in place, and money for home and auto maintenance and repair as needed, but don't let your luxury income turn into a luxury lifestyle. Once you become accustomed to high-style living, you may have difficulty scaling back to a more affordable lifestyle once you retire.
Instead of living large, it might be time to scale down. A smaller house may mean a smaller mortgage and more to invest or enjoy. It can also mean fewer expenses over the long term, and provide added peace of mind knowing you'll already have a manageable space when it's time to retire.
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