NEW YORK (CNN/Money) -
You didn't think it was a big deal to cash out your 401(k) when you changed jobs. Every dime of it was your hard-earned dough. Retirement is decades away. And it was just $7,337.32. Not a fortune, just enough to pay down your credit card balance and buy a new couch.
Not a big deal, sure, until you discover you'll have to pay income taxes of up to 38.6 percent on the amount of your withdrawal, as well as a 10 percent penalty.
Most people don't think of retirement mistakes on the same level as, say, flunking out of college or winding up in jail. But retirement mistakes are some of the worst blunders you can make, because they affect you for decades.
"If you're not aware of some of these mistakes, it will be bleak for you," said Rich Zito, a certified financial planner in New York. "I don't know if you'll be able to retire."
Top 10 retirement bloopers
1. You aren't saving at all for retirement.
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This is the Hall of Fame for dumb retirement mistakes, when you just ignore the fact that you will someday stop collecting a paycheck. Social Security will replace only about 40 percent of your income -- less, if you make a fat salary -- so you'll have to come up with the rest on your own.
2. You cashed out a 401(k) or an IRA.
This is one of the most expensive retirement mistakes you can make, Zito said. Here's a simple way to look at it. Let's say you're in the 35 percent tax bracket. You withdraw $10,000 from a 401(k).That means a penalty of $1,000 for withdrawing before age 59-1/2. Plus, you'll pay federal income taxes of $3,500. And on top of that, you'll pay state taxes.
"People get killed when they cash out a plan," Zito said. "You'll really take a big hit when you pull the money out."
3. You aren't taking advantage of your company 401(k).
If you've ever walked by money lying on the sidewalk, that's about the same thing as ignoring your 401(k) plan. In many cases, companies will match 50 cents on the dollar up to 6 percent of your pay, for a total of 3 percent of your annual salary. That's free money you will miss out on if you don't participate in the plan.
You may just postpone participating in the program and assume it's not a big deal. Some companies allow you to sign up for their 401(k) the day you start your job, or three months later. But if it takes you a year and a half to do the paperwork, that's months of tax-deferred savings that you've thrown out the window.
4. You don't know the first thing about IRAs.
There are two types of IRAs -- Roth and traditional. Both offer tax-advantaged growth. But with a traditional IRA, you pay taxes on the earnings when you withdraw since the account is funded with pre-tax dollars. You pay no taxes when you take money out of a Roth, since the money you use to fund the account was after-tax to begin with. Your income will determine whether you can deduct contributions to a traditional IRA, and whether you qualify for a Roth.
Which is best? The less desirable option is a traditional, non-deductible IRA since contributions do not provide a tax deduction. But earnings do grow tax-deferred. The choice between a deductible and a Roth is more complicated, but generally you're better off in a Roth if you expect to be in a high tax bracket when you retire. (Click here for more on the rules.)
5. You're not diversified.
The best way to save for retirement is to have a solid asset allocation plan where you spread your bets among different types of stocks and bonds. Parts of the portfolio will be up in some years, and parts will be down. (For more on how to build a great asset allocation plan, click here.)
And don't think you're diversified just because you own mutual funds. For example, you might own five funds that have the same three stocks in their top 10 holdings. That could mean you're betting your retirement on Intel, Microsoft and GE.
6. You didn't learn from the Enron fiasco.
Remember all of those tragic stories about Enron employees who lost everything when the company want bankrupt? The problem was that their 401(k)s were loaded with company stock. Many companies, like Procter & Gamble, Texas Instrument and GE have 401(k)s that are 75 percent or more in company stock.
It's only after the Enron tragedy that investors realized the danger of company stock. Stock volatility has doubled in the last 30 years, and you're tying your career and your retirement on the fate of one company. Employees at Enron -- and Lucent, Polaroid and Global Crossing, to name a few -- have learned the hard way. (Click here to read about 401(k): the fatal flaw.)
7. You assume you'll need less.
In the old days, financial planners used to say you'll need 70 percent of your income after you stop working. But that figure is long gone now. These days, people are living longer, healthier lives. And they're doing things: They're traveling, building dream homes, eating out more often. Life is expensive, and chances are good you'll need more than you think to live on.
In fact, you may well spend more in retirement than you did while working, according to Mark Groesbeck, a certified financial planner in Houston. The "go-go" retirement years up until age 70 could be among the most expensive of your life.
8. You're not taking advantage of higher savings limits.
Thanks to tax law changes in 2001, you could be salting away a lot more dough for your golden years. But are you taking advantage of the new contribution limits? The pre-tax savings cap for 401(k)s increased this year to $11,000 from $10,500 last year. The amount will increase gradually every year to a maximum of $15,000 in 2006. (Click here for more on 401(k) savings limits.)
For IRAs, savings limits increased to $3,000 this year from $2,000 in 2001. That figure also rises, to a maximum of $5,000 in 2008. (Click here for more on those rules).
Both 401(k)s and IRAs have catch-up provisions for people age 50 and over. For 401(k)s, you can save an extra $1,000 a year, and the amount increases to $5,000 extra by 2006. For IRAs, you can save an additional $500 a year until 2006, when you can save an extra $1,000 annually.
9. You don't have a smart withdrawal plan.
So you have a tidy sum saved at retirement. Now what? Many people don't come up with a disciplined plan to make sure their money lasts as long as they do. The smart approach is to be conservative -- assume an 8 percent market return instead of 10 percent; and assume a higher rate of inflation, Groesbeck said.
Most planners recommend withdrawing no more than 6 percent of your portfolio each year. (For more on living in retirement, click here for MONEY's 2002 retirement guide.)
10. You borrowed from your 401(k) when it wasn't really an emergency.
It's so easy to dig into your 401(k), isn't it? Just a phone call away, you can have a check for thousands of dollars on its way to you in a matter of days. In some cases, companies will allow you to have more than one loan outstanding, Groesbeck said.
Most people don't realize that they'll have to repay that loan, in most cases in 90 days, if they leave their jobs. Plus, they are missing out on market growth while they're paying it back.
"One of the problems of 401(k)s is they're getting too accessible," Groesbeck said.