NINE BIG MISTAKES

What to Avoid When Saving for Retirement

When it comes to funding your retirement, you have to watch your step. What seems reasonable today may not ultimately help you reach your goals. You’ve heard the stories. Hardworking people on the road to achieving their retirement dreams become sidetracked by unforeseen developments. Unexpected medical expenses. A downturn in the stock market. A job loss. You may have experienced setbacks in your own retirement plans. Maybe you haven’t contributed as much to your retirement savings as you’d originally planned. Maybe you’ve been too aggressive with your investments in an attempt to improve your portfolio’s performance and reach your goals sooner.

Watch Out: Factors That May Throw You Off Course

Many investors fail to consider how the following may become obstacles along their road to retirement:

• Inflation

• An improperly allocated portfolio

• Taxes

• Underestimated expenses

• Unrealistic expectations

• Reliance only upon returns

• Length of retirement

• Tax-deferred asset mismanagement

• Health care expenses

To learn more about why these issues are concerns, and about the importance of addressing them before they cause you to stray from your retirement path, read on.

 

Everything changes. To learn from the past, we must first look at the common mistakes many of us make. In this report, you’ll learn about nine mistakes investors often make with their retirement

savings and receive tips for avoiding these errors.

1. Forgetting About the Effects of Inflation

Inflation can eat away at your savings and threaten your ability to maintain your lifestyle during retirement. During the next 20 to 30 years, your cost of living will likely double — or even triple.

For example, a retirement fund of $1 million generating 7% interest today may generate a $70,000 income. But in 20 years at a conservative 4% inflation rate, you’d need more than double that income — $153,379 — to maintain the same standard of living. Will your investment income keep up with the cost of living? Through a simple analysis, your financial consultant

can help you evaluate your ability to meet future needs considering your current expenses, inflation, taxes and annual savings.

2. Not Having a Properly Allocated Portfolio

Asset allocation is the combination of asset classes (such as stocks, bonds and cash) in your portfolio and their proportions to one another. Proper asset allocation can help you take advantage of return potential while balancing risk. Many investors’ retirement assets are not properly allocated based on their risk tolerance and stage in life. By not having an appropriate asset allocation, these individuals could be exposing their portfolios to undue risk or investing

too conservatively. Either way, they will likely fall short of reaching their retirement dreams.

For example, if you are in your early 30s and have many years until retirement, an asset allocation that is too conservative (e.g., investing only in bonds) may hurt your ability to accumulate enough for the future, especially after taking the effects of taxes and inflation into account. On the other hand, if you are a retiree in your late 60s, investing too aggressively (e.g., investing only in growth stocks) could keep you from meeting your income needs and expose your portfolio to more risk than necessary. When evaluating your portfolio’s asset allocation, don’t overlook the asset allocation of your taxable investments. All of your investments should

work together to help you reach your goals. Therefore, your taxable investments’ asset allocation should complement the asset allocation of your tax-deferred investments. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Asset allocation does not guarantee against loss; it is a method used to help manage investment risk.

To find out whether your current investment mix is appropriate for your retirement goals, ask your financial consultant for a free Asset Allocation Analysis. This analysis will provide you with a snapshot of your current portfolio and recommend how you can reposition your assets to betterachieve your objectives or reduce your portfolio’s volatility.

Inflation’s Powerful Effects
If Prices Rise 4% Annually

 

 

3. Underestimating Taxes

Like inflation, taxes can erode your investment savings. Many people do not take full advantage of tax-deferred investment vehicles when saving for retirement. By investing in a tax-deferred investment — such as an IRA, 401(k) or annuity — your money can accumulate free from tax until you withdraw it at retirement. That means you may have more money to generate more retirement income for a longer period of time. Any withdrawal before the age of 591⁄2, however, may be subject to a 10% IRS penalty and fully taxable. The hypothetical example at right shows how much more you can save for retirement in a tax-deferred investment versus a taxable investment. It illustrates an 8% rate of return on a $3,000 investment for 40 years. If you were in the 33% tax bracket, you would see that after 40 years of investing that amount annually, tax deferral would double the account where the earnings were taxed each year. If you withdraw the money all at once at the end of the period and pay the taxes at the 33% rate, you will still

end up with about $184,869 more than you would have with a taxable account.* Only the earnings are taxable and, if taken before the age of 591⁄2, may be subject to a 10% IRS penalty.

Lower tax rates on capital gains and dividends may result in more favorable returns on taxable investments, thereby reducing the difference in performance between the accounts shown. You should consider your personal investment horizon and income tax brackets, both current and anticipated, when making an investment decision because these may further affect the results of the comparison. Fees and charges are not reflected in the illustration and would reduce the performance shown if they were. To help counteract the effects of taxes as well as inflation, you should maximize your participation in your company-sponsored retirement plan and contribute regularly to an IRA.

4. Underestimating Your Spending During Retirement

Many people make the mistake of assuming they’ll need less than 50%† of their preretirement income to sustain their retirement lifestyle. When they eventually retire, they find themselves spending at least 85% of their preretirement income — if not more. They take more vacations, make home improvements and dine out more frequently. Plus they often face unexpected

health care, long-term care and other expenses. Will you have enough money to fund your retirement lifestyle? Your financial consultant can help you estimate how much money you will need during retirement and show you strategies that could help you supplement your income.

* The amount of your withdrawal, combined with other income sources, will determine which tax bracket is applicable to your specific situation. Please consult your tax advisor. †2005 Retirement Survey, Employee Benefit Research Institute 3

$417,091

The Benefits of Tax Deferral

5. Having Unrealistic Investment Expectations

Some investors believe when the market is down they should sit on the sidelines until it rallies. If the market is up, they wait for a correction and buy at bargain rates. These tactics seldom work. When building assets for retirement, you need to stay focused on your long-term goals. Prudentinvestors stay in the market. The chart to the left shows the effect on someone who invested on

Jan. 1, 1996, and missed the best 10, 20, 30 or 40 market days of a 10-year trading period. Missing just a few of the market’s best days during that period resulted in significantly reduced returns. If you missed 30 or more of the best days, you would have actually lost money. It’s not market timing, but time in the market that can bring about long-term success. It’s important to base your long-term investment planning around realistic return expectations. Keep in mind, there will be up and down years. Successful investors, however, develop the discipline and patienceto shrug off market fluctuations.

6. Relying Solely on the Investment Returns of Your Portfolio

Some retirees vow never to touch their investment principal and plan to live off only their interest and dividend payments. However, by doing this, they can create serious income and estate tax consequences for their heirs. Your financial consultant can help you determine whether you are at risk of leaving more to the IRS than to your loved ones. He or she can prepare a complimentary estate tax projection for you that will calculate your current and projected estate tax liability and show you ways to keep more of your money in your family.

Market Timing — The Risk of Missing Major Opportunities

S&P 500 Annualized Returns 1996-2005

Source: FACTSET Data Systems, Inc. This hypothetical illustration is based on the Standard & Poor’s 500 Composite Index

with dividends reinvested over the 10-year period of 1996 through 2005. This chart is for illustrative purposes only. Past

performance is no guarantee of future results. This chart is not indicative of the performance of any specific investment.

 

 

7. Underestimating the Time You Will Spend in Retirement

Because of better nutrition, quality medical care and a growing health consciousness, life expectancies continue to increase in the United States. You may not realize it, but many Americans now live until they are 90 or 95 years old. In fact, the time you spend in retirement may equal or even exceed your working years. That means you may live 20 to 30 years without receiving a paycheck. Will your assets last until you are in your 90s, or will you outlive your nest egg? Your financial consultant can help you determine how long your retirement savings will last and help you develop a plan to make sure you continue to receive an income stream throughout retirement.

8. Mismanaging Your Tax-Deferred Assets

Some investors start taking withdrawals from their IRAs and annuities as soon as they reach 591⁄2. In fact, some people take withdrawals even earlier. However, this may not be the best approach. Remember — you could live 20 or 30 years in retirement, and taking withdrawals earlier than necessary may cause your nest egg to deplete faster. Consider withdrawing funds from taxable investments first. This will give your tax-deferred vehicles more time to work for you.

Americans Are Living Longer

Life Expectancy (Years)

Source: CDC National Vital Statistics Reports “United States Life Tables, 2002”

9. Failing to Plan for Unexpected Health Care Expenses

One of the greatest risks to your retirement nest egg is long-term care expenses. People age 65 face at least a 40% lifetime risk of entering a nursing home sometime during their lifetime.* Today the average annual cost of a nursing home stay is more than $64,000.† If you require nursing home care in 20 years, it could potentially cost you more than $170,000 each year, assuming a 5% annual increase in costs. Keep in mind, government assistance for these expenses is very limited, and few people qualify for it. Without proper planning, you could see long-term care expenses wipe out your life savings, leaving you no money to live on and nothing to leave behind for your loved ones. Your financial consultant can introduce you to insurance strategies that could help you safeguard your retirement assets and preserve your wealth for your heirs.

*America’s Health Insurance Plans “Guide to Long-Term Care Insurance,” 2003, 2004†“The MetLife Market Survey of Nursing Home & Home Care Costs,” September 2005.