6 biggest retirement mistakes

NEW YORK (CNNMoney.com) -- Saving for retirement is an intimidating task and everyone makes mistakes. To mark financial literacy month, we asked financial experts about the missteps they see most often and how to avoid them.

It usually happens when you're switching jobs: You have to decide whether to roll your 401(k) into an IRA or to cash it out. It's tempting to take the money, but squandering retirement savings on a big screen TV could cost you a lot in the long run.

For example, a 401(k) distribution of $5,000 that's taken at age 25 can be worth about $75,000 assuming it earns 7% over the next 40 years. And you'll lose a big chunk of that $5,000 just by taking it out; Uncle Sam will take about half of any withdrawal in taxes, and you'll have to pay a 10% early withdrawal penalty.

A recent study by human resources consultancy Hewitt Associates found that 60% of 20-somethings fall prey to this trap. Ultimately, "it's not the $10,000 you save at age 55 that matters, it's the $2,000 you save at age 25 that does," says Tom Kmak, CEO of Fiduciary Benchmarks.

Lots of companies are reinstating their 401(k) matching plans. That's good news for investors who take advantage of them, but plenty of savers still don't contribute enough to bank that free money!

A company match can range between 50 cents and $1 dollar for every dollar you contribute, up to a set maximum which is usually a percentage of your salary, or in some cases, a dollar limit. The contributions you miss out on can add up quickly, says Kmak.

Assume a plan that matches 50 cents on the dollar up to 6% of your annual salary -- if you're not contributing enough to get that match, it's like giving up 3% of your pay each year. On an annual salary of $50,000 that's $1,500 out the window!

Sadly, fewer than half of working Americans have even tried to calculate their magic number, according to a recent study from the Employee Benefit Research Institute.

The best place to start is by setting a retirement age -- then you can figure out how much you need to sock away every month to meet your goal.

But be careful. Picking the wrong retirement age could have big consequences, experts say.

If you decide to retire just five years before the full retirement age of 67 years old, not only will you cut your 401(k) off early, but you could also reduce your Social Security benefits by 30%!

A recent Fidelity study found that the cost of health care in retirement could be as much as $250,000.

Many are unprepared for this expense because they overestimate what Medicare and Social Security pay for, says Bill Losey, a certified financial planner. "There's a misconception that nursing homes, assisted living, and in-home nurses are covered by Medicare and Social Security, but that's not the case," he said.

Losey says buying long-term care insurance could help solve the problem -- but many people fear the high costs. Still, he says that most people can get reasonable long-term care insurance policies by saving as little as 1% of the value of their investments annually.

The number one way to find the money for this insurance, he says, is by canceling unnecessary life insurance policies.

"A lot of my clients go into retirement holding on to life insurance that they don't need," said Losey.

He also tells people to find the money they need but cutting investment fees, so they can cover the cost of a new policy without having to come up with more money out of pocket.

For more details on Medicare and Social Security, see our Guide to Retirement.

Your retirement assets require regular upkeep just like your house and your car. Ignore them and they could fall apart.

This means making regular tune-ups to your retirement accounts, reallocating your assets when necessary, instead of dumping money into the account and walking away. "Review and rebalance your investments at least once a year to make sure you're comfortable with the level of risk in your portfolio," says Chris McDermott, senior vice president of investor education for Fidelity Investments.

If keeping a close eye on your portfolio is too stressful, invest in a life cycle or target date fund that rebalances automatically as you approach your "target" retirement age.

Getting a late start is as bad as frittering your nest egg away.

For proof, look at the following example: Let's say a 25 year-old begins saving $3,000 a year in a tax-deferred retirement account, but stops after only 10 years. Over the next 40 years, he could expect that $30,000 investment to grow to more than $472,000, assuming an 8% return.

If the same investor waited until age 35 to begin saving and stashed $3,000 a year for 30 years, he could only expect to have about $367,000, assuming the same 8% annual return. By waiting 10 years to start saving, you lose out on the benefits of time and compounding returns, not to mention over $100,000!

"Payroll deductions make it easier to save and it doesn't require a lot of heavy lifting," says McDermott.

But, if that's not possible, contributing regularly to a tax-advantaged IRA is the next best thing. His bottom line:save early and safe often.