Retirement Illiteracy Costs

Many of us do not have a basic understanding or knowledge about finance to make good financial decisions for ourselves. Studies have shown that this financial “illiteracy” is widespread across the U.S.

Our financial system offers many options for people to save, invest and obtain credit. But having all these options is not necessarily a good thing. These increased options have also added more complexity to a financial system that was already pretty intimidating for many people.

Financial illiteracy can lead to people not only making poor financial decisions it makes people vulnerable to predatory practices such as predatory home lending, payday loans and other financial scams.

Often we don’t respond to something until it’s almost an emergency. “So in good periods, we get a little lax, and then we get these huge wake-up calls. The recession has forced people to take stock of their personal finances; the bad news is that by waiting too long, many find themselves trying to dig out of a hole or having to resort to putting out fires.

The biggest mistake, especially in this down market, was that people quit saving for retirement. As long as they still have their job and everything, they should have continued saving.

During today’s economic downturn, you can be assured that regardless of the events that occur in the marketplace, somebody will find them profitable. It never happens without a reason. There is no easy formula since there are so many variables. Your age and how much you think you will need to live on in retirement are two of the variables that are critical.

You must also determine where the income will come from when you do retire. … The younger you are now, the longer you will have your money working for you to build for retirement.  However, as a rule of thumb, the amount of equity exposure you should have should be about equal to the number 100 minus your age. 

 It’s never too late to start planning your retirement. However, the closer you get to retirement age, the more aggressively you need to save. It’s also possible that you might have to work a few years longer than you thought you would.

In the last two years Americans have lost $2 trillion from their defined contribution retirement accounts.  Pensions have been scaled back, social security benefits now exceed payroll taxes and market investing is riskier than once thought. 

On the bright side annuities are the only products that provide both guaranteed income for life and principal protection.  An insurance company is contractually obligated to make payments for as long as an annuitant lives. That would tend to imply an annuity has more value. In fact, not one annuity holder lost a penny due to the recent crisis due to standard insurance requirements, unless the annuitant cashed out during a surrender period which is self-inflicted loss.

There are several common mistakes that slow down the retirement planning and savings process according to All Business. Here  is their top 10.

Not taking advantage of time: The earlier you start the more your money will have time to grow in your retirement accounts. Too many people make the mistake of putting off starting a retirement savings plan.

Not investing regularly: Many people start investing and then stop. If you do not invest on a regular basis, you cannot expect your retirement savings to grow.

Not taking full advantage of tax-free retirement accounts: The more money you put into tax-free retirement accounts, the more you can grow tax-free. If you can afford to put in the maximum contribution to your retirement accounts each year, you should do so.

Not allocating assets wisely: If you are investing too conservatively, you may not be able to build the amount you are hoping to have for your retirement years. Conversely, if you are getting close to retirement and are investing in high-risk investment vehicles, you may lose much of what you have worked so hard to save. How you allocate your assets is more important than what you select within a given asset class.

Not creating a post-retirement plan: As you approach retirement you should determine how much money you will need and establish a plan for handling your money during your retirement years. This would include knowing all of your income sources, including investments, Social Security, and pensions.

Not paying attention to your 401(k): Although most employees who are eligible for a 401(k) plan through their employers are taking advantage of it, many are not paying much attention to their investments within the plan. You should follow your investments in your 401(k) and make the necessary adjustments as you approach retirement.

Cashing out or borrowing heavily against your 401(k): The 401(k) is not a security       blanket to be used when you need additional funds. It is the core of a retirement plan. Let it grow.

Not considering tax and inflation: When considering your post-retirement income needs, you must remember to account for inflation and the inevitable taxes.

Relying too heavily on Social Security: When calculating your income sources as a retiree, you cannot rely too heavily on Social Security. While it was never meant as a complete source of retirement income, it once factored more heavily into a retirement plan. Today the potential impact of Social Security on your retirement income is diminishing.

Relying too heavily on your company’s stock: Many people make the mistake of believing that owning many shares of company stock indicates their loyalty to the company. It does not. It is an investment and like any other investment it can go either way. While you may wish to own some shares in your company, it is typically advised that you do not invest too much in your company’s stock. Spread your assets around.