Avoid Gaffes When Saving for Retirement

Funding your retirement requires careful planningand is a task that shouldn't be taken lightly.Even if you have a sound strategy laid outtoday, you need to be aware that things can changealong the road to reaching your retirement goals. Tohelp you evade possible pitfalls that may confront youin the future, the following is a list of common mistakespeople make when saving for retirement.

•Forgetting inflation. Over the next 20 or 30years, it's very possible that your cost of living willdouble or even triple. And while the effects of inflationaren't so obvious from year to year, when you'relooking at retirement savings you need to considerhow inflation will impact your finances over thecourse of several decades.

•Lacking proper allocation. The combinationof asset classes (eg, stocks, bonds, and cash) in yourportfolio is what's known as your asset allocation.Unfortunately, many investors' portfolios are notproperly allocated for their risk tolerance and stagein life. If you're in your 30s, for example, you havemany years until retirement, so you can probablyafford a little more risk in your investments. Aretiree in their late 60s, on the other hand, couldexpose their portfolio to too much risk by investingaggressively. Remember, asset allocation does notguarantee against loss; it is a method used to helpmanage investment risk.

•Underestimating taxes. Similar to the effectsof inflation, taxes can also be detrimental to thehealth of your retirement savings. Investing in tax-deferredprograms, such as an IRA or 401(k), allowsyour money to accumulate tax-free until you withdrawit at retirement.

•Underestimating retirement spending.While you may think you will need less money tomaintain your lifestyle, many people find that theyspend almost 85% of their preretirement incomewhen they finally reach retirement. Taking morevacations, making home improvements, and diningout more frequently are just some of the manyexpenses you may encounter, not to mention unexpectedhealth care or long-term care expenses.

•Expecting unrealistic investment returns.Your long-term investment strategies should be basedon realistic return expectations. There will always befluctuations in the market, but it's important not to letthose distract you. To achieve success with your retirementinvestments, you need to develop the disciplineand patience to stick with your long-term objectives.

•Relying solely on investment returns. Likemany others, you may be under the impression youcan build a sizable retirement nest egg and then liveoff the interest and dividend payments alone.Unfortunately, while such a strategy may serve youwell, it can create serious income and estate tax consequencesfor your heirs. Therefore, you may want toconsider other options.

•Underestimating retirement years. Anotherthing you may not consider is just how much timeyou will actually spend in retirement. Better nutrition,quality medical care, and growing health consciousnesshave all contributed to longer life expectanciesin the United States. Keep in mind the timeyou spend in retirement could even exceed yourworking years, so you'll need to make sure yourmoney will last as long.

•Failing to plan for health care. Along withadditional life expectancy comes the possibility you'lleventually need some form of long-term care.Without careful planning in advance, these expensespose a significant risk to your retirement savings.Fortunately, there are insurance strategies you cantake advantage of that can help safeguard yourretirement assets. As with most aspects of successfulinvesting, it's important to plan ahead.

Joseph F. Lagowski is vice president, investments, and a financialconsultant with AG Edwards in Hillsborough, NJ. He welcomesquestions or comments at 800-288-0901, or visit www.agedwards.com. This article was provided by AG Edwards & Sons, Inc,member SIPC.