7 Easy Ways to Mess Up Retirement

Some things we can't control. These we can, and here's how to do it.

Never in all the years I’ve been writing about retirement planning have so many things been so much in flux: the job market, the stock market, the entire world economy. At this point it’s anybody’s guess how Social Security and Medicare might change. Ditto for the U.S. tax code, which plays a role in countless retirement-related decisions. You don’t have to be crazy to wonder, why bother to plan at all?

My answer to that, or at least what I keep telling myself, is that this is one of those situations in life where there are things we can control and others we can’t. And we might as well not mess up the former. In that spirit, here are seven common mistakes most of us can avoid if we choose to.

Not having a plan
Many of us reach middle age with little more than a vague notion of our plans for retirement. Sure, we might be funneling cash into IRAs and 401(k) accounts every year but otherwise we’re just too busy earning a living to really focus on it. At a minimum, all of us ought to have at least a best-guess estimate of (a) how much money we’ll need to retire and (b) how much we’ll have to save and invest each year to get there. Also worth considering: (c) how we plan to use our time and energy in retirement. That’s not strictly a money question, but it seems to trip up a lot of people, including many who have done everything right from a financial perspective.

Not having alternative plans
These days one plan is no longer enough. You might plan to retire early, late, or never, but your employer might have different ideas. So it makes sense to have at least a plan B and possibly a C, D, and E. For example, what would happen if you had to retire before age 65, when Medicare eligibility begins? What if you find yourself supporting an adult child or other relative? What if you plan to sell your house but the real-estate market collapses?

Not knowing what you’ve got
Part of any planning exercise should be a thorough inventory of our investments. Besides retirement accounts, which might represent the bulk of our wealth, many of us have picked up an assortment of other assets over the years: a Krugerrand or two, shares of an ex-employer’s stock, a bit of leftover cash in a child’s 529 college savings plan—you name it. It might take the better part of a weekend to sort it all out, but the result could be a pleasant surprise. “People may not realize all that they have,” notes Michael J. Garry, a certified financial planner in Newtown, Pa.

Underfunding accounts
Each year we don’t put as much money as we can into 401(k)s and similar tax-deferred plans, we’ve missed an opportunity. This year the limits on 401(k) contributions have risen to $22,500 for anybody over 50 and $17,000 for everybody else. Unless your 401(k) plan is administered by incompetents or thieves, it’s worth contributing as much as you can, especially if you’re entitled to an employer match.

Wimping out on risk
Garry says he sees a sudden aversion to risk among many new retirees. “People sometimes look at their retirement date as the end line, when they don’t want to take any more risks with their investments,” he says, “whereas the real end line is death.” With any luck, most of us could be retired for three or four decades, and a portfolio consisting of “safe” investments like CDs and Treasuries is unlikely to keep pace under even modest inflation. With inflation recently running at 3.9 percent and five-year CDs yielding an average of 1.2 percent before taxes, it’s easy to see how overly cautious retirees can lose ground pretty fast.

Ignoring fees
Many of us were outraged recently, and rightly so, when banks started hiking debit-card fees and other charges. But we seem to have resigned ourselves to retirement-plan fees, which can be just as dastardly and far less transparent. In one illustration provided by the U.S. Department of Labor, a 401(k) plan charging 1.5 percent a year left a participant with 28 percent less money after 35 years than a similarly performing one charging 0.5 percent. Unfortunately, 401(k) fees are notoriously murky and rife with potential conflicts of interest, although new disclosure rules are supposed to address some of that this year. And, of course, you also need to be aware of fees on investments outside your retirement accounts.

[Also see: Cheapest Weekends to Travel in 2012]

Depending on home equity
Bottom line, it’s best not to count home equity in your net worth unless you plan to sell your house and are absolutely certain how much profit you’ll walk away with. Garry suggests looking at home equity as a form of insurance in case your other retirement projections don’t work out exactly as planned. And given the world we live in now, that’s a possibility.