SOURCE: Allianz Life Insurance

March 29, 2010 08:00 ET

Retirement Planning Mistakes

And How to Avoid Them

MISSION, KS--(Marketwire - March 29, 2010) -  (Family Features) If you're concerned about your ability to retire, you're not alone. Gallup's 2009 annual Economy and Personal Finance survey showed that most non-retired Americans, (52 percent), doubt they will have enough money to live comfortably once they retire.

Whether your retirement is 4 or 40 years away, it's important that you put a strategy in place so that you will be able to retire with fewer worries. To help you get started, here's how to avoid three common retirement planning mistakes that could cost you money.

Mistake #1: Doing Nothing
Millions of people are worried about having enough for retirement, but many of them aren't doing anything about it. Nearly 60 percent of workers don't even know how much they need to save for retirement, according to the 19th Annual Retirement Confidence Survey, released by the Employee Benefit Research Institute. The survey found that:
--Only 44 percent of workers report they have tried to calculate how much money they will need to have saved by the time they retire.
--An equal proportion (44 percent) simply guess at how much they will need for a comfortable retirement.

What to Do: Start Now
"A lot of people think that it's too early or even too late for them to start saving for retirement," said Jasmine Jirele, vice president of Market Management and Product Innovation for Allianz Life. "But now, more than ever, people need to take action in order to have a more secure future."

A young adult who starts investing now gives their money more time to multiply. There are also ways for older workers to increase retirement earning potential.
--Plan to work a little longer. According to the Social Security Administration, for those born in 1943 or later, each year beyond age 66 that you delay collecting Social Security adds eight percent to your benefit.
--Increase monthly contributions to employer retirement plans. Having money invested now will help you build a larger nest egg for retirement as the markets continue to improve.

In addition to participating in employer retirement plans, look into other investment options such as mutual funds, IRAs, bonds and certificates of deposit. "Some workers may also want to consider an annuity for a portion of their retirement portfolio," said Jirele. "Annuities are contracts between you and an insurance company. You make payments over time, and when you retire, you receive a guaranteed income for life that can help meet your retirement needs." Product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Variable product guarantees do not apply to the performance of the variable subaccounts, which will fluctuate with market conditions.

Keep in mind when you'll need to access this money. If you'll need to withdraw money from your annuity before age 59 1/2, the IRS may assess a 10 percent federal tax penalty, and the insurance company may assess surrender charges that are taxed as ordinary income, if funds are removed before contract terms allow. Withdrawals also reduce the value of the annuity and the value of protection benefits.

Take time to research any company you're thinking about investing with. Resources such as A.M. Best (ambest.com) and Moody's Investors Service (moodys.com) can be of help.

Mistake #2: Underestimating Needs
A study by McKinsey & Company in 2009 found that the average American family will fall 37 percent short of the income needed to maintain its standard of living during retirement.

"One mistake people make when they try to calculate retirement needs," said Jirele, "is that they don't take inflation into account."

Jirele said that even small inflation rates can do damage over time. If consumer goods prices rise three percent a year over the next 30 years, for example, items that cost $100 today would cost $134 in 10 years, $181 in 20 years and $243 in 30 years.

So if you're planning to live on $60,000 a year during retirement, a three percent inflation rate means that in 10 years you would actually need $80,635 a year, and in 20 years you'd need $120,000.

What to Do: Create a Realistic Plan
There are plenty of tools available to help you figure out what your retirement needs will be. You can find online tools and worksheets at these Web sites:
--American Association of Retired Persons (AARP): aarp.org
--Financial Industry Regulatory Authority (FINRA): finra.org
--American Savings Education Council (ASEC): choosetosave.org
--The National Endowment for Financial Education (NEFE): smartaboutmoney.org
Investing in securities can help keep up with the effects of inflation. Options include:
--Treasury Inflation-Protected Securities (TIPS). TIPS pay a fixed rate of interest, but the principal is adjusted based on changes in the Consumer Price Index. That means payments rise with inflation. You can buy TIPS through a bank, broker or from the Treasury Department (treasurydirect.gov).
--Stocks. Over the long term, stocks have historically proven to be a good way to stay ahead of inflation. Many financial advisors recommend having some stock investments.
--Variable annuities. "Variable annuities can help keep up with the effects of inflation by offering market growth potential," said Jirele. "You need to participate in the market if you want to grow your assets. Market participation is one way to help offset inflation and accumulate the money needed for retirement."

Mistake #3: Going It Alone
While many investors feel confident about their abilities, less than half got a passing grade on a basic financial literacy assessment, according to FINRA's Investor Education Foundation. The older the investor, the less he or she is likely to know.

What to Do: Get Professional Guidance
Money management is a lifelong process and there are a lot of things to consider. It might be in your best interest to find a financial professional to help you navigate through it all.

Jirele recommends five steps to finding a financial professional:
1. Identify your most important financial needs.
2. Describe the type of relationship you'd like to develop.
3. Identify several financial professionals that you think may fit your needs and style.
4. Make a general inquiry by phone to further qualify.
5. Meet and interview several people to find the best match.

Where can you find a financial professional? Here are some resources to get you started:
--Financial Planning Association -- fpanet.org
--Certified Financial Planner Board of Standards -- cfp.net
--Securities and Exchange Commission -- sec.gov

Retirement planning isn't something that you should put off -- at any age. Spending a little time now developing a realistic retirement strategy alongside a financial professional can help you achieve your long-term retirement goals.

Illustration courtesy of Getty Images

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