Four Mistakes Educators Make in Financial Planning
March 11, 2009
It's no secret that these are tough financial times. Between the sub-prime mortgage crisis and what U.S. News & World Report calls "the most sweeping financial bailout since the Great Depression," everyone"educators included"is uncertain about the safety of their money and where their assets are best kept.
We asked the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) what the four most common mistakes are that teachers make in their financial planning. Regional Vice President Jeff Gonzales had these answers.
1. Not starting your retirement planning in your 20s"30s
Most individuals do not start planning for retirement until about 45 years old. Before then, the majority of people envision retirement being a very distant thing in the future. Waiting to save for retirement will cost them thousands of dollars in the end though "¦ Also, there's a misnomer in regards to the impact of saving for retirement: It reduces one's take-home pay a lot less than most people think, and that's not even factoring in the immediately monthly tax savings.
2. Not getting the company match
Approximately 30 percent of workers who are eligible do not participate in their company's retirement plan. Not getting the company match is essentially turning down "free" money. You can also look at it from this standpoint: If you do not take advantage of even a 1 percent match, you are turning down a 100 percent return on your investment.
3. Tapping into your 401(k) and also not rolling over your 401(k) when you start a new job
The best course to follow to accumulate dollars for retirement over the long-term is to leave your 401(k) fully invested in a tax deferred vehicle so it can grow without capital gains and interest taxes over time, until you are ready to begin income in retirement. However, there are times when one should consider tapping into their 401(k).
Not rolling over your 401(k) plan when you start a new job raises several schools of thought. First and foremost, individuals should keep the money invested in the existing 401(k) plan, a rollover IRA or roll it over to the retirement plan associated with the new job versus cashing it out to pay bills, etc.
4. Retiring early"especially, taking social security too early
The central question would be: Is it better to start earlier with smaller benefit payments or is it better to start later with larger benefit payments? This dilemma could be easily answered if we knew how long we were going to live. There are a couple of financial guidelines one can follow though. At times, it would make more sense to take the earlier reduced payment from social security so that you did not have to withdraw that amount from your pre-tax, tax-deferred accounts. Pre-tax, tax-deferred accounts will more than likely increase more over time than the benefit increase with social security over the same time period.
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