4 Financial Missteps That Can Ruin Your Retirement

By Wendy Connick Markets Fool.com

When retirement is decades away, it can be hard to take the need to prepare seriously. The early days of one's career tend to be consumed by more immediate concerns: career advancement, getting your own place, starting a family, and so on. But it's often the early part of your career that sets the tone for your financial behavior throughout your working years. Long before we retire, we develop good money habits and bad.

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Catching common financial missteps as early as possible can have a profound impact on how comfortable your retirement will be. Here are four traps to avoid falling into.

Not saving enough for retirement

It's important to have a retirement savings plan so you know how much you'll need in retirement and therefore how much you need to save each month to get there. If you're setting aside just 5% or so of your pay every month, for instance, that's almost guaranteed to be too little to fund your retirement. And if you're within a decade or less of retirement, it's even more important to figure out how much you need to save and start saving it. If you've waited this long to "run the numbers," you may face more of a challenge to save enough, but it's definitely possible to do so. This handy calculator can help you pin down your savings goal.

You also can't just park your retirement savings in a bank account: The interest rates paid on even the best savings account won't be enough to beat inflation, let alone grow your capital sufficiently. Those funds should be invested, preferably in an account designed for retirement savings such as a traditional or Roth IRA. Such accounts offer substantial tax benefits that can help your savings grow faster and last longer once you're living off them.

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Carrying a lot of debt

If you're making a good salary, you may feel perfectly comfortable carrying a large load of debt because you have no trouble making your payments every month. However, that debt load will get a lot more crushing once you stop working and are no longer enjoying a high income. Ideally, by the time you retire, you should have zero debt -- which includes owning a paid-off house. In that situation you can live quite comfortably on a small income, which means you don't need to save nearly as much in the years leading up to retirement. If you have a lot of debt, start paying it down today no matter how far you are from retirement. Reducing your debt over a span of decades is much easier than having to do it over just a few years. Plus, once you've gotten rid of your debt, you can take at least some of the money you've been funneling into those payments and put it toward retirement savings instead.

Choosing poor investments

The stock market goes up and it goes down, but a mix of solid stock and bond investments held for the long term typically prospers no matter what's been happening with the economy. And the closer you get to retirement age, the more important it is to choose investments wisely so that your portfolio doesn't take a massive hit right before you planned to retire. For example, shifting your investments from stocks to bonds as you age will help lower your portfolio's volatility and the odds it will take a nosedive. For those who prefer to take a more hands-off approach to investing, target date funds can be a good choice. Another option is to pick one or two no-load index funds or ETFs. Also be sure to check on your portfolio's performance at least once or twice a year so you aren't surprised by major underperformance.

Having financially dependent kids

When your children are young, they naturally depend on you as a source of income. But once they move out of the nest, if you're still financing their lives, you have a ticking time bomb that can easily destroy your retirement dreams. Once you retire, it's highly unlikely that you'll have enough income to take care of both you and your adult children. That's why it's important to teach children early on how to manage their finances in such a way that they can become independent. If you're approaching retirement and your children are still dependent, start weaning them off you as a source of funds. Frame your financial contributions as loans, rather than gifts, and put them in writing, including payment terms and interest rates. And make your limits clear -- then stick to those limits.

Is it too late?

If you're already within a few years of retirement and you're suffering from one of the above financial complications, you may need to take emergency measures. First, consider putting off your retirement a few extra years. I know, you can probably already taste those mai tais, but waiting just a few years longer can greatly improve your financial position and ensure you have a pleasant retirement. Second, consider turning to a financial advisor for professional help on how to fix your situation. And third, don't give up. You may have to compromise a little on some of your plans, but you can still have a fabulous retirement.

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