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Top 12 retirement bloopers
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June 15, 2001: 9:00 a.m. ET
The Dirty Dozen: the 12 retirement mistakes you don't want to make
By Staff Writer Alexandra Twin
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NEW YORK (CNNfn) - Perhaps you've heard of people like "Hugh." The 62-year-old had had it with his boss. He had sweated away in middle management for 30 years, squirreled away $250,000 in his 401(k) and the future was wide open.
He and his wife were going to live large, and as for the $30,000 in credit card debt? No problem.
So Hugh did what many people only dream about – he walked into his boss's office and quit.
"You can kiss my a---," said Hugh, who for obvious reasons wished to remain anonymous.
Welcome to the Hall of Fame of dumb retirement investing mistakes. Like Hugh, a client of Mari Adam, a certified financial planner in Boca Raton, Fla., thousands of people are pulling dumb and dumber routines with their nest eggs.
Adam and four other certified financial planners offered up a dirty dozen of big retirement No-Nos, some from their own personal files, others that are so common, they can't be pinned on just one person.
Other panelists include Mary Mahoney of Albuquerque, N.M.; Robert Veasey of East Providence, R.I.; Bryan Lee, of Garland, Texas; and Chris Cooper of Toledo, Ohio.
Hugh, Adam's client, felt terrific for a full three weeks. That is, until it hit him that he had made the largest and most far-reaching financial mistake of his life, and it was going be hell to fix it.
Do you feel superior to Hugh? Well, don't. Adam estimates that Hugh's series of blunders lead the list of the most common retirement mistakes made.
But as a wise man once said, "If my life cannot be a shining example to others, at least let it stand as a glaring warning of what not to do."
Tales from the "what were you thinking?" file
Making emotional decisions. Hugh's first mistake was taking a business and financial situation and making it personal. He didn't like his boss, fine. But quitting and abandoning his chances of saving enough for retirement first before quitting was impetuous and dangerous.
Assuming your nest egg is big enough. Got lots of zeros on your various retirement accounts? Great. But just because it's the largest sum of money that you've ever had access to doesn't mean that it's enough to sustain you after you factor in inflation. Assuming a 4 percent rate of inflation, $80,000 a year now will equal $175,290 by 2021. In Hugh's case, $250,000 to $300,000 is not nearly enough money for two people to live on.
Even someone who has set aside $1 million is not necessarily in great shape. Depending on your plan, that amount might leave you with growth that allows for $40,000 in income a year. After taxes, you are living on about $32,000, a decent sum depending on your geographic location, but not ideal.
Cashing out your 401(k). When people leave jobs, their tendency is one of two things: a) they cash out of their 401(k) right away and spend it, therefore accruing unnecessary penalties and taxes, instead of rolling it over into an IRA or; b) they leave it in their former employers 401(k), which limits their choices for investments and distribution methods.
Failing to consider the tax implications of your retirement decisions. Furthermore, they don't think about the fact that all that money in the tax-deferred accounts will eventually need to be .... Taxed!
Adam's client, Hugh, took $80,000 out of his 401(k) to cover debt, expenses, and vacations, forgetting to account for the fact that he would then owe $20,000 in taxable gains tax for the year. When tax time came around, he didn't have any money and had to borrow it from his 401(k), therefore continuing the vicious cycle.
Confusing good debt and bad debt. Think it would be great to pay off your house with some 401(k) or IRA money? It sounds good, but if you eliminate the kind of debt that would give you deductions, or prevent you from paying off other debt with higher interest, such as credit cards, you are not really helping yourself. You actually want to keep that "good debt," Lee said.
Assuming that you won't live that long in retirement. Many people are stuck in what Adam characterizes as a "1970s mentality," thinking that they are going to retire at 62 and be dead at 72. This is rarely the case. With biotechnology and medical breakthroughs, you may be around a lot longer than you realize. Life expectancies are rising all the time, and you could spend a minimum of 30 years in retirement.
In fact, many people may be in retirement nearly as long as they are in the work world. A person who finishes an advanced degree and starts working at 27, to retire at 62, has spent 35 years as a worker. That 62-year old may well live to be 90, another 28 years.
Putting off retirement planning. You may think you'll be retiring in 18 months or even 18 years, but if you don't plan and save, you will not be retiring at all. A new study shows that baby boomers spend about an hour a month on financial planning, compared with about 120 hours watching TV.
If you contracted a disease, you would certainly face up to it and go in for treatment, yet so many people close their eyes and say, I'm going to retire soon, but I don't want to look. It's too scary to think about and the research and planning is too boring and involved to deal with.
If you don't want to deal with the planning, that's fine, but please pay someone else to do it for you, because the issue isn't going to go away.
Investing only in what you know. A client of Lee's had an IRA with almost $20,000. Within nine months, it had lost almost 75 percent of its value, or close to $15,000. Why? Because the man was a telecom industry worker who took his previously well-diversified IRA and decided to reallocate it so that it was 90 percent in telecoms.
When the sector dipped substantially last year, his portfolio derailed and he was also forced to take a substantial pay cut to stay at his job.
Think it's just regular people who do this? Lee pointed out that U.S. Commerce Secretary Don Evans has a portfolio that's 80 to 90 percent oil and real estate. Evans' prior job was as a career oil man, holding jobs such as chief executive officer of Tom Brown, an oil services company.
Waiting for Prince Charming, who never shows up. A credit card advertisement from a couple of years ago entreated female customers with the line "because the last time you looked at your bank account was three boyfriends ago." While the implication smacked of sexism, there is in fact a growing number of women who won't do anything in terms of planning for their financial future, because they are counting on someone else to bail them out and care for them.
Assuming you'll get more from Social Security. The earliest you can start taking distributions is 62. If you're not working, great, go for it. If you are working and are under 65, the amount of your deductions will be reduced permanently.
Furthermore, most people of any age have ridiculously inflated ideas of how much Social Security is going to give them monthly. Whatever you think the amount is, divided it by 3 and that's probably what you're actually going to get, Adam said. Most experts say Social Security will replace only about 30 percent of your income.
Don't believe it? You can take a look. The Social Security administration recently started an annual mailing to workers to estimate monthly payments.
Being too prideful about part-time work. You realize that you need more money than what you planned for. But you don't want to get a $10,000 a year, part-time clerical job that would ease the burden because you consider yourself over-qualified. The hard truth is you may have to go back to work part time to support yourself after your "official" retirement.
Having no cash reserves for emergencies. You have enough in accounts you would rather not touch, but you have no emergency fund, no cash available for the occasional large purchase and you did not factor in that in retirement, you will need to pay for your own health insurance.
But whatever you do, be flexible when it comes to getting through a retirement blooper.
"Not only in terms of finances, but in a broader sense, in terms of enjoying the life change that is retirement, the biggest mistake you can make is to be inflexible" Adam said. "Even if they make one of these big retirement mistakes, if people can be flexible and resourceful, they can usually make it through just fine." 
* Disclaimer
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