The 6 Most Costly Retirement Plan Mistakes

By Pamela Yellen

The percentage of Americans who won’t have enough money in retirement has barely budged in several years despite rising stock and real estate markets. “That means far too many folks are going to be forced to choose between putting food on the table and paying for the medical care they need,” Pamela says.

How is this possible? Conventional retirement plans have very costly traps that can cost you hundreds of thousands of dollars over your lifetime and rob you of retirement security. Following are the 6 most costly retirement plan traps Pamela can discuss in detail:

1. Government controlled retirement plans have no guarantees or predictability. They’re tied to the stock market. Along with a chance of gain you also have a greater chance of loss and it can take a very long to recover from a significant market loss.
2. Fees compound against you: You pay fees whether your account does well or it tanks, and the impact is much more than people realize. Based on the average fees levied by such plans, if you grow your money 7 percent over 35 years, 28 percent will be devoured by fees.
3. Most employer-provided plans are administered by people who are unqualified. An estimated 90 percent of the country’s 401k plans are watched over by people with “no special qualifications and no investing expertise or experience” according to “The Accidental 401(k) Planner” (SmartMoney, Nov. 2009.) One study found that plan administrators routinely choose mutual funds that fall far behind comparable indexes in terms of growth.
4. You have no control over the rules. Your employer can change the rules and so can the government. Not long ago IBM changed the rules from giving employees their 401(k) match with each paycheck to on the last day of the year. Now hundreds of thousands of IBM employees lose an entire year’s growth on the match money and if an employee is fired in November he doesn’t get any match for the year. “The question you have to ask yourself is could your company be next in line to cut back your 401k plan benefits?”
5. The government may try to take over your retirement account. The Consumer Finance Protection Bureau has been weighing whether it will take a role in helping Americans manage the money they’ve put into retirement savings. “Why are government controlled savings plan such an attractive target for government ownership? It is for the same reason that notorious holdup man Willie Sutton gave when asked why he robbed banks: ‘That’s where the money is,'” Pamela says.
6. The tax time bomb. Money you put into a tax-deferred tax plan isn’t taxed now but it will be taxed later. If taxes go up and you are successful in building your nest egg, you will end up paying higher taxes on a bigger number. Many retirees surveyed report they are paying the highest tax rates of their lives. To make matters worse, required minimum distributions after age 78 can push retirees into a higher Social Security tax rate, sucking up more of their retirement income and raising Medicare premiums.

Pamela Yellen is a financial investigator and the author of two New York Times best-selling books, including her latest, The Bank on Yourself Revolution: Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future. Pamela investigated more than 450 financial strategies seeking an alternative to the risk and volatility of stocks and other investments, which led her to a time-tested, predictable method of growing wealth now used by more than 500,000 Americans. See www.BankOnYourself.com.