NEW YORK (CNNfn) - There may be seven deadly sins, but when it comes to retirement mistakes, you'll be in good shape if you avoid making just three.|
Don't spend down your accounts prematurely; don't delay in saving; and whatever you do, don't invest in roller-coasters.
If, like a lot of people, you've fallen off track, don't lose heart - there are some steps you can take to recoup some of your hard-earned money.
Sin #1: Touching
Retirement plans - 401(k)s, 403(b)s, 457s, IRAs -- are a little like museum pieces. They shouldn't be touched.
If you do take a loan or early withdrawal, "you're undoing all the good you've done," said Atlanta-based certified financial planner Bill Kring.
Not only will you lose the benefit of compounding, you will pay a 10 percent penalty on early withdrawals as well as tax on the money withdrawn.
And while loans may be less injurious than withdrawals, they're far from harmless. You repay a loan with after-tax money and pay interest that is not tax-deductible.
A lot of people who borrow from a 401(k) mistakenly think the money is still there, said Wayne Bogosian, managing director of the Personal Financial Education Group. "People forget the 'opportunity loss.' You lose the opportunity to make money on your money."
Of course, the truth is, "if someone needs the money they don't care what the hit is," Bogosian said.
The PFE Group has found that many people who want to borrow against their 401(k) tend to do so repeatedly, treating their retirement plan more like a checking account than a long-term savings vehicle.
People who are starting a business and need seed money, not to mention cash flow, may be particularly susceptible. "They often have the false impression that their business will be their retirement," Kring said.
That's why Bogosian and others recommend treating your retirement money as a haven of last resort. Instead, seek out other sources of financing: A home equity loan may be cheaper than taking money out of the market and the interest you pay is deductible; family members may be a willing source of help; or, if you've built one up, consider using your emergency fund.
If you have taken a loan or withdrawal, make it your last, expert say. And pay yourself back as promptly as possible. Finally, whatever you do, don't stop making contributions. You will lose out on market return, and if you're working for a company, you will lose the advantage of any employer match.
Sin #2: Procrastinating
Feeling forever young is a good thing. Pretending you'll never get old, and spending accordingly, is not.
You do your savings great harm if you don't take full advantage of retirement plans at work since you get to put money away tax-deferred and lower your taxable income by doing so.
You also may be forfeiting free money, if your employer offers matching contributions. So even if you do invest in a plan, financial experts say, put in as much as you can every year, but at the very least put in enough to qualify for the full match.
The self-employed, concerned more with immediate cash flow than long-term savings needs, may feel they have no choice but to delay socking money away. But retirement contributions should be built into everyone's business plan, experts say.
"(A lot of self-employed people) don't make the effort to set up the right plan and to fully fund it," Kring said. So, make sure to explore all your plan options and realize that you may need to contribute more than you did in your old job to compensate for the loss of an employer match.
Whatever your job situation, don't put off taking responsibility for your money because you expect a windfall, such as inheritance. A lot of people count on one prematurely without considering that their parents may remarry or have other needs for their money besides your financial well-being, said San Luis Obispo, Calif.-based certified financial planner Judi Martindale.
Sin #3: Hanging off a ledge
OK, so none of the above applies to you. You've been diligent about saving, and you've resisted the temptation to nibble away at your nest egg.
Before you buy a T-shirt that says, "It's tough being perfect, but someone's got to do it," have a look at where you've put your money. If you've bet the barn solely on biotech or large-cap stocks or some other lone segment of the market, think twice.
Financial experts recommend that investors keep their long-term portfolios diversified across sectors, investment styles and asset classes so that they can benefit from the parts of the market doing well while not tying the bulk of their fortunes to those segments faring poorly.
If your long-term money is all in one place, a prolonged downturn in that area, or even a short one with a less-than-hoped-for rebound, can hurt.
Say you lose 50 percent of your investments after a rocky patch on Wall Street. "You now have to make 100 percent to get even," Kring said.
Taking the cure
Whatever your circumstance, what's done is done and now is the time to remedy the situation, experts say.
If you've already taken a loan or early withdrawal - pay it back as soon as you can and try to keep those contributions coming. Just as important, Kring said, "look at the root of the problem." While never easy, you may need to wean yourself from a pattern of overspending, if that is what put you in the predicament in the first place, he said.
If you're considering taking another loan or withdrawal to finance your home or business, try postponing the move for a few years and spend that time aggressively saving as much as you can for the new project. Otherwise, exercise all other funding options before dipping into your nest egg.
If you've put off saving for too long, take advantage of every opportunity available to you, starting with maximizing your contributions to retirement plans at work. And, if your income qualifies you for a Roth IRA, open one now before your salary grows too high or the laws change.
"It's too good to pass up," Kring said, noting that even though you contribute to the fund with after-tax dollars, the money grows tax-free.
Invest in yourself, not regret
It pays to remember that a poorly funded retirement is usually not the result of just one mistake, but rather a series of them, Kring said. So committing to making as few as possible, learning from the mistakes you did make and not wasting time regretting the past are critical steps in financial recovery.
"We can take some comfort knowing that we'll never make that mistake again," Martindale said, who suggests Americans start to resist the incessant pressures on them to buy today, pay tomorrow.
But more importantly, she added, the more energy you spend on regret, the less you'll have to make the money you need.