6 retirement saving pitfalls and how to avoid them

By Alaina Tweddale

For Savings Accounts

Published: Wednesday, April 9 2014 1:12 p.m. MDT

Workers' confidence in their ability to fund retirement is rebounding, according to a recent survey by the Employee Benefit Research Institute.

Creatas Images, Getty Images/Creatas RF

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Editor's note: This article originally appeared on SavingsAccounts.com. It has been reprinted here with permission.

Workers' confidence in their ability to fund retirement is rebounding, according to a recent survey by the Employee Benefit Research Institute. A positive uptick in confidence is a step in the right direction, particularly on the heels of record lows between 2009 and 2013. Despite the nascent economic recovery, there are still pitfalls that can derail retirement readiness.

"We all have tendencies to do things that are outside of our best interests," says Emily Guy Birken, author of "The 5 Years Before You Retire: Retirement Planning When You Need it the Most." "With limited time to recover from mistakes and the high consequences you face if you make one, it's better to avoid retirement planning mistakes than try to recover from them."

Here are six common pitfalls that can derail a retirement plan.

1. Avoiding market volatility at the wrong time

Any investor who's been around since at least 2008, when the broad stock market lost nearly 40 percent of its value in one year (as measured by the S&P 500 Stock Index), knows that returns can be wildly unpredictable. However, cashing out a portfolio locks in investment losses so an investor can't benefit from a future market surge, like the one experienced in 2009.

"We as investors need to be smarter than our brains," says Birken. She adds that this is true "when things are going gangbusters and when they're going poorly."

2. Never re-balancing investments

While staying the course during periods of market volatility is recommended, so is taking an active role in managing your retirement portfolio. Birken recommends working with a trusted financial adviser to plan a diversified investment strategy. Periodically, as market conditions vary over time, investment allocations fall out of balance. Birken suggests re-balancing at regular intervals to bring your portfolio back into alignment.

3. Following a poor income-stream plan

Market volatility is particularly hard on retirees, as they don't have the time to recoup investment losses.

"In the first five years of retirement, you want your money to stay put," Birken says. "You want it to be very stable."

Birken recommends placing the first three to five years of retirement income in a very low risk option like a money market account, CD or savings account. Birken suggests rolling new money into the short-term account once per year during retirement, as assets are depleted.

4. Borrowing from a 401(k)

A 401(k) or other tax advantaged retirement account offers, for most people, the greatest opportunity for saving and investment growth. A loan from the account leaves less time for your money to grow, and that can have a dramatic affect on a portfolio's health come retirement time.

Even more damaging, however, most employers require a loan to be repaid in full at separation, potentially leaving you locked into a job you don't truly love or, even worse, expected to fulfill a large debt obligation at the same time you lose your job. If you don't repay a loan when you leave your job (whether willfully or not), you'll be taxed on the money at ordinary income rates and assessed an additional 10 percent penalty, unless you're over the age of 59 1/2.

If you really need a loan, Birken recommends considering a home-equity loan before borrowing from a 401(k).

5. Failing to consider health care costs

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