If you’re about to call it a career, the last thing you want sent your way are retirement problems. You spent years socking away your hard-earned cash, so you better be sure it’s there for you when you need it. Besides employer fraud, there are several retirement program pitfalls you need to avoid. Here are my top 5:
1. Double-Tier Annuities
If you are a public employee, you have to really watch out for annuity contract traps. Often, some sharpie salesperson talks you into putting your 403b into an annuity. If that weren’t bad enough, the annuity they pawn off on you is a “double-tier” annuity. This means that your account value depends on how you access the money when you need it.
If you want to tap into a lump sum, you’ll get 15% to 25% less than what your account is really worth. In fact, with these stink bombs, the only way you’ll get all your money is if you annuitize the account when you retire. That means they’ll let you have a small portion of your money over five years or longer. If you want to get your hands on it faster than that, you’ll pay a 15% to 25% penalty, as I said. These types of investments should be illegal if you ask me, but since nobody is asking me, they are still out there. Watch out and don’t get sucked in.
While you might indeed only tap into your retirement account over several years when you retire, you should have the option of taking it all or doing a tax-free rollover when you retire. That way, you’ll have a much broader menu to select investments from.
2. Wrong Investments
Unfortunately, investments are often sold rather than purchased, and that’s often the case when it comes to retirement programs. Again, if you are part of a government retirement program, you probably have a wide variety of investment options available …but you’d never know it. The administrators only allow a handful of people on campus and set them up in rooms to meet with you and sell you their schlock. Why do the administrators do this? I’m not saying it’s because they are in cahoots with the unions. I would never imply that.
How can you make sure this doesn’t happen to you? Simple. Tell your administrators to send you the full list of available investments for your retirement program. And never ever meet with the slick salesperson in your lunchroom.
Once in a while, people in retirement programs get scammed by employers. There are plenty of ways for this to happen of course, but it’s also pretty easy to avoid this.
When you make contributions to your retirement account, make sure the checks go directly to the custodian. Your checks should never be made out to the salesperson. Also, insist on having a well-known custodian. Finally, confirm your account balance directly with your custodian every quarter.
4. Not Taking Advantage of the Program
While the prior three mistakes have been external threats, you actually pose the greatest threat to your retirement program. The first threat that you pose to yourself is failure to take advantage of the program. You simply cannot bury your head and pretend that your retirement will take care of itself. Get educated and take action. If you don’t, nobody else is going to.
5. Taking Loans
The final threat is taking loans against your retirement balances. This is almost as bad as not making contributions towards your retirement program. Of course, there are always circumstances during which you have no choice, but often people create those circumstances. If you are tracking your spending, you already know that there are always unexpected expenses. You should always have a reserve, and in most cases you won’t need to ever tap into your retirement accounts. The big problem, my experience tells me, is that once you start borrowing it’s very tough to ever stop or pay it back.
What has been your experience with retirement program pitfalls? What other problems should we avoid?