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3 Ghosts of Retirement Planning

Scott Holsopple

'Tis the season for sharing classic holiday stories, so in keeping with that spirit, sit back in your favorite armchair as I recount a tale once told about a different kind of spirit.

I woke up this morning haunted by the vivid nightmares that plagued my sleep last night. Haunted - there is no other word for it. And I feel an overwhelming urge to make serious improvements to my retirement planning.

My dreams were taken over by three spectral apparitions last night: the Ghost of Retirement Mistakes Past, the Ghost of Retirement Mess-Ups Present and the Ghost of No Retirement Future.

When the Ghost of Retirement Mistakes Past appeared, he ferried me off through space and time to my life 15 years ago. I watched myself leaving my first job to begin my second and cashing out my 401(k) account rather than rolling it over. The younger version of me thought the $2,500 account balance wouldn't matter in the future. Then, in the blink of an eye, the ghost turned me around and several years passed instantly. I saw myself take out a large loan from my 401(k). "But it seemed like a really good idea at the time," I cried out, remembering that the loan made up a large portion of the down payment on my house.

Perhaps my cry broke the spell, for the next thing I knew, I was back in my bed. But the nightmare persisted. Before I had a chance to dwell on those long-ago financial mistakes, another ghost appeared and introduced himself as the Ghost of Retirement Mess-Ups Present.

As the Ghost of Retirement Mess-Ups Present touched my hand, the bedroom disappeared and I found myself at work. It was my first day on the job, and I was enrolling in benefits. I decided to contribute 5 percent of my pay to my 401(k) plan, which seemed like plenty, and I invested my savings in my plan's default fund. "Aha, ghost," I said. "There is nothing here to frighten me." Or so I thought. The Ghost of Mess-Ups Present then forced me to look in on myself every quarter thereafter. In all of the years since enrolling, I never did a quarterly rebalance. I never increased my contributions. I never considered making any investment changes. I had truly embraced the "set it and forget it" mentality with my 401(k) investing.

Next, I found myself in my bedroom. As I struggled to awaken from my nightmare, I reassured myself that my actions and inactions of the past were of no concern. Oh, no! Another somber spirit shook his head as he looked at me and then introduced himself as the Ghost of No Retirement Future.

My surroundings fell away once more and I was shocked to see my 60-year-old self before me. I could see my unknowing future self poring over my 401(k) account statement to see whether I could retire in the next few years. Sadly, I would not be able to do so. The ghost quickly pulled me through time again, and I saw that I would need to continue working well into my 70s, at which point stress-related health problems would force me to retire. I never could afford to take the golf tour that was my big retirement dream; I never went fly-fishing in Alaska or skiing in Canada. Instead, I had a lower standard of living than I had ever imagined and it was devastating to see. I couldn't help crying out, and the nightmare dissolved. I woke up abruptly, and I was right back where I had started. But I was no longer the same as I had been before I went to sleep.

Now, with the dream fresh in my mind, I'm going to take serious retirement planning action. Here's what I'll do:

1. Today I'm going to increase my 401(k) contribution rate to 10 percent and put an annual reminder on my calendar to increase it by at least 1 percent every year until I reach the IRS's annual contribution limit. I'm also going to direct any employer bonuses or other windfalls toward paying off my 401(k) loan balance, so I don't continue to lose out on potential market growth.

2. I'm going to determine my investor type and come up with a diversified investing strategy. My risk tolerance, which is my level of comfort in the face of market ups and downs, is paramount to determining my investor type. My current financial situation is important, as is the number of working years I have remaining. The more years I have until retirement, the more time I have to recover from losses, meaning I can invest as aggressively as my risk tolerance allows in the hope of seeing bigger gains.

3. I'll take a serious look at my budget and try to trim some fat to afford more retirement savings. Easy areas to cut include entertainment, dining out, cable/phone package and vacations.

4. I'll set calendar reminders to do the following:

--Rebalance my investments on a quarterly basis (and make investment changes if appropriate)

--Re-evaluate my contribution level on an annual basis with an eye toward reaching the plan and IRS maximum annual contribution rates as soon as I can.

--Re-examine my investor type every two years and make changes to my investment lineup accordingly, as needed.

I breathed a sigh of relief, for I don't think I'll ever have to see those ghosts again.

Let this be a cautionary tale to all who read it. Take a good, hard look at how your own retirement future is shaping up, so that you can take the necessary actions now to position yourself for a comfortable retirement later. Plus, you'll get a better night's sleep if you keep those retirement ghosts at bay.

Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.