Common missteps that can kill your plan

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By Robert Brokamp

The tenets of healthy living are almost cliche by now: Eat your leafy greens, increase your core strength with some weight-bearing exercise, and get in a cardio workout every day for at least 30 minutes.

Managing your financial life is about as rote: Spend less than you make, regularly sock away some money for the future, and when you’re 65 or so, pack up your desk, slap on some sunscreen, and head to milder climes.

In other words, save your leafy greens and lift your golf bag with your legs, not your back.

Unfortunately it takes just a few missteps to throw the best plan way out of whack. So here are a few potholes to avoid on the road to retirement:

Not saving enough

You may have heard that you should save 10% of your income. That’s a fine rule of thumb, but it ignores an important question: What are you saving for? If the answer is I’m saving so I can retire at age 50 on my own beachfront property, 10% may not be enough — especially if you start saving at age 40.

Take the time to match your savings with your goals. Our online calculators can help. Saving just $100 more a month for 20 years could add up to almost $60,000 (assuming 8% annual growth). Bump that up to $500 a month and you could have almost $300,000 in a couple of decades.

Wonder where you’re going to scrape up an additional 500 smackaroos each month? Are you sure that you’re not overlooking something? Consider this common gotcha.

Ignoring gifts from Uncle Sam

You’d never turn down a dollar if it were offered with no strings attached. That’s what you’re doing if your company offers a 401(k) or similar retirement savings plan with an employer match and you’re not participating. Contributions to employer-sponsored retirement accounts — 401(k)s, 403(b)s, etc. — both reduce taxable income and allow your money to grow tax-deferred. Plus, your boss may often pay you extra to contribute!

Uncle Sam — in a moment of generosity — created even more tax breaks and savings incentives with Individual Retirement Accounts (IRAs) and the like.

Enough with the acronyms. Let’s talk dollars and cents. Say your household income is $75,000 a year and you contribute $7,500 to your 401(k). First off, that immediately cuts your tax bill by approximately $1,800. Second, if your employer matches 50 cents on every dollar contributed to the plan up to 6% of your salary (the most common matching formula), then your boss will deposit an additional free $2,250 into your account. Put that together and you’re now up to $4,050 of tax savings and free money.

Uncle Sam and your boss are willing to pay you more than four grand to save for your future. Sounds great, eh? Yet so many Americans leave their retirement money on the table.

Our goal with the Rule Your Retirement service is to reverse that trend. We want to make sure that not one participant ignores this important part of his or her future retirement.

Feeling too old, thinking it’s too late, fearing that the market’s too risky

There are some excuses that we simply do not accept in Fooldom. If you think you are too old to save, or that it’s too late to make a difference in your future, or that the market is just too risky for your long-term stash, we ask you to reconsider. And if you are one of the one-third of all Americans who contribute nothing to your retirement account, we beg you to change your way of life. Even if your contributions aren’t matched, you’ll still reap hundreds to thousands of dollars’ worth of tax savings while doing something that’s good for your financial future.

Perhaps you think it’s too late to really make a difference in your golden years. Nothing could be more untrue. Sure, the earlier you start, the better off you are. If you’re already past those formative 20s and 30s (you don’t look a day over 42 to us), let’s just say, Better late than never.

Worried that the pittance you have available to invest this year won’t amount to much in the future? Let’s see how far last year’s average tax return could get you. If a 40-year-old contributed that $1,967 refund annually for 25 years to an IRA and earned an average 8% a year, she’d add almost $165,000 to her nest egg. Hardly a pittance, we think.

Maybe you’re apprehensive about investing right now — the stock market is too volatile for you to add to your retirement kitty. There is no guarantee that the market will go up the first day, month, or even year that you invest in it. But there is one guarantee: Doing nothing at all will not provide for a comfortable retirement.

Lowballing health-care expenses

Health care and retirement are linked at the prosthetic hip. Comfortable golden years are no longer based just on savings, Social Security, and a pension. Retirement planning now also necessitates health-care planning. Failing to factor in health costs (remember, Medicare requires premiums and co-payments and doesn’t cover many medical services) can cripple your retirement.

Perhaps you’ve already factored in health-care costs into your retirement plan. If you haven’t revisited that figure in a while, you probably should. The cost of health care in America has been increasing at a double-digit pace in recent years. These rising costs should be disconcerting to every American, but it’s an especially important topic to retirees. All those years of working, recreating, conjugating, and procreating take their toll on a body, increasing the need for repairs and tune-ups.

According to a recent report by the Medicare trustees, Medicare’s trust fund is projected to be depleted in 2019. That’s seven years sooner than last year’s projection, due in part to increased health-care costs, lower tax receipts, and the new prescription-drug benefit.

Any medical expenses not covered by insurance or Medicare must be paid for out of a retiree’s nest egg. How much will be needed to cover such expenses? According to the Employee Benefit Research Institute, someone retiring in 2003 would need $37,000 to $750,000 if she has employment-based health insurance, and an astonishing $47,000 to $1,458,000 if she will rely on Medigap.

Overpaying to invest

It’s simple math: The more you pay to invest, the less you’ll get back in return. So-called frictional costs — brokerage commissions, fees, loads, 12b-1 fees, and taxes — leave less money to compound through the years. Which is why The Motley Fool has long recommend discount brokers and no-load, low-cost mutual funds.

This isn’t news to listeners of The Motley Fool Radio Show. In a timeless interview. John Bogle — founder of the Vangard family of mutual funds — had this to say about fund fees:

Management fees in this industry run about 1.6% for the average equity fund. By the time you add in portfolio turnover costs, which nobody discloses, and you add the impact of sales charges and opportunity costs because funds aren’t fully invested, and out-of-pocket fees, you are probably talking about another 1.4% of cost, bringing that 1.6% management fee or expense ratio up to 3% a year. That is an awful lot of money.

In other words, the average mutual fund has to earn 3% a year just to break even. Ouch.

To see how harmful this can be, let’s look at this from an angle we can all understand: Cold hard cash: Meet Bert, who began saving $100 a month at age 25. He’ll continue to do this until he retires at age 65. The compounded average annual return of the stock market since 1926 is 10.4%. Bert didn’t earn that, however, because he was paying more than 2% a year in fees and commissions. At age 65 he has $349,100.

Not bad, right? Actually, that’s pretty paltry. Had Bert instead invested in something that charged just 0.40% a year (which is higher than the costs on most index funds), his $349,100 would be $632,407 — almost twice as much!

Are you paying that much, whether it’s in the form of fees to your mutual fund or commissions to your stockbroker? If so, make sure you’re getting your money’s worth. The best way to do that is to see if your investments have beaten their respective indexes over a three-year period. If not, then you’re paying too much for too little.

Investing like it’s 2008

We’re sure that, right after Father Time rang in the New Year, you kissed your sweetheart, considered your resolutions, and wondered whether the contribution limit on your retirement account would increase. Ahem.

OK, we’ll give you a pass for the first few days of the new year. But if you’re still contributing only $15,000 to your 401(k) — all we have to say is: That’s so last year.

Just take a look at the 2009 contribution limits:

• 401(k), 403(b), 457 accounts, and SARSEPs: The annual contribution limit in 2005 is $16,500. For those 50 and older, you can make a catch-up contribution of $5,000.
• SIMPLE plans: The contribution limit is $11,500, and the catch-up contribution (again, for the half-centenarians and beyond) is a cushy $2,500.
• Traditional and Roth IRAs: The limit stays at $5,000, and the catch-up contribution limit will remain $1,000.

If you have money taken out of your paycheck and deposited in a retirement account, and that amount is based on last year’s limits, contact your human resources department and have the amount changed.

If you’re behind on your savings, catch-up contributions can go a long way toward building a more beautiful retirement. If you’re 50 and up, go ahead and invest like your age.

Going it alone

Planning and saving up for retirement can be a long and lonely road. But you don’t have to go it alone. Try the buddy system. Grab a financial workout partner (how about the one who shares your roof?) and come up with some immediate steps that’ll provide your svelte selves a fat-cat retirement.

If you need a gentle-handed drill sergeant to hone your form and inspire some discipline, consider our Rule Your Retirement service. The Rule Your Retirement newsletter is just part of the package. It really starts with our members-only website, which features our great Motley Fool discussion boards staffed by retirement experts. We also have special sections on asset allocation and model portfolios, and feature online tools, including calculators and our Roadmap to Retirement How-To Guide.

When you add all this up, you have a great solution that can meet each of our members where they are, in whatever way is most helpful to them. Our Rule Your Retirement members will ultimately discover where they stand, estimate where they’ll be, and learn what they can do to improve their situations.

The best part of all, however, is the community of folks who meet daily online to ask questions (privately or publicly), share ideas, and read and swap retirement-related stories.

If you need a buddy, consider Rule Your Retirement — a reflection of the interests, hopes, and conundrums of everyday folks working to make their golden years really shine.