Watch Out for These Retirement Gotchas
If you’re saving for retirement, you need to do your due diligence. After all, a “set it and forget it” mentality could mean your investments are being eaten by high fees.
Whether your retirement is 30 years off or just around the corner, you could be making big mistakes with your money. Between hidden fees and money traps you’ll encounter, here are different ways you could be putting your retirement goals in jeopardy.
Failing to Contribute in Time for Taxes
Yes, there can be a right time to contribute to your retirement account. After all, you do want to cash in on the tax benefits of your 401k, right? Moreover, you don’t want to be responsible for making a lump sum contribution to your retirement account, lest you go over budget or sink your emergency funds because you forgot to make regular contributions throughout the year.
Rather than wait until tax season to contribute to retirement savings, opt instead for automated payments. Adjust your contributions so you’re reaching the maximum contribution limit each year — and don’t forget, you can make catch-up contributions if you’re over the age of 50.
Scheduled payments to your retirement account alleviates any worries you might have over not meeting savings goals for the year. Plus, it takes the legwork out of actually saving.
Overlooking 401k Fees
There’s no shortage of retirement plans out there — or fees. “People don’t know inherently, in any investment, there are fees and they have mathematical consequences over time,” said Tom Zgainer, CEO of America’s Best 401k.
But knowing what you’re paying matters. “You have to know the difference between 3 percent and 1 percent, or 2 percent and 1 percent, in fees can shave off 10 or 20 percent of your retirement savings over time,” said Zgainer. “It’s a massive amount of money, considering we’re living longer.”
According to a report from Morningstar, expense ratios across all funds hit 0.64 percent in 2014. An expense ratio of that amount might not sound like much, but that annual fee will eat $6.40 for every $1,000 you have invested.
This retirement “gotcha” can be a costly oversight over the 35 or so years you’ll spend saving for retirement. And don’t forget, even if you have a poor year in the market, that expense ratio will still cut into your savings, making a bad year even worse.
When setting up your 401k, look through the fine print carefully and make note of the expense ratio. If you can find a retirement account with a lower expense ratio, dig deeper to see if you’re due to switch funds.
Paying High Advisor Fees
Like mutual funds that can carry surprisingly high expense ratios, some financial advisors charge high fees, and they don’t always make those fees easy to understand or identify. Sometimes it’s a percentage fee, and sometimes it’s in basis points, which imagines each percent as 100 basis points or a fraction of a percent.
In any form, financial advisor fees can add up to hundreds of dollars per year. Additionally, the financial advisor could be reinvesting the money into other actively-managed funds with their own hidden fees, which can further eat away at returns.
Research your options when it comes to finding a financial advisor. You can opt for a lower-cost online advisor, which can cut those fees to 0.25 percent, for example, or find financial advisors who charge by the hour, which can be an expense that’s easier to track.
Related: 10 Things You Need to Know Before Choosing a Financial Planner
Not Spotting the Hidden Cost of Annuities
An annuity is a form of an insurance contract built into a 401k that invests the account holder’s money and, in return, pays out a steady income either in the future or right away. Retirement annuities offer tax advantages that appeal to many people. These investments can grow tax-deferred savings.
Unlike a 401k or IRA, annuities have no contribution limits, making them a useful tool for people close to retirement age and needing to catch up.
When it comes to setting up an annuity contract, however, people should be aware of the potential fees. Annuities can come with surrender charges, management fees and mortality and expense charges. You’ll want to review these fees closely to see whether an annuity works with your retirement strategy — or if you’re better off sticking to more traditional savings plans.
Falling Into the Reverse Mortgage Trap
Not everyone can pay off a mortgage by retirement, and if you can’t, you need to consider the cost of your mortgage payment plus property taxes, homeowners insurance and all those random repair costs when things go wrong. Facing these and other financial concerns, some retirees who consider themselves cash poor but “house rich” turn to reverse mortgages.
But reverse mortgages are only suitable for people in specific circumstances and should be used carefully and strategically. You’ll want to consult a mortgage or financial advisor before proceeding with a reverse mortgage.
One of the biggest risks behind a reverse mortgage is the risk of losing your home. If you need to move out, your loan could become due. And, of course, you’ll need to fork over a lot of money for fees, which only eat more of the money you’re taking out against your home equity.
Getting Suckered Into a Timeshare Scam
Whether your retirement plan includes downsizing to a tiny home or moving to a senior community, you need to watch out for housing pitfalls like high homeowners association fees and timeshare traps that target retirees. Any home purchase should be thoroughly researched, but people planning out their retirements on fixed incomes need to be particularly cautious of 55-and-over communities and timeshare opportunities that sound too good to be true.
Timeshare companies use high-pressure sales tactics to convince people to buy properties that typically come with annual maintenance fees and blackout dates on when owners can visit.
A common scam in recent years that targeted senior citizens in particular is when a person posing as a reseller calls the timeshare owner saying he has a buyer or poses as the buyer and then asks the owner for an amount of money up front to process the sale, according to a report from the California Department of Real Estate. The owners never see the money or hear from the scammer again. In legitimate sales, commissions are paid at the time of the sale, not up front.
The tens of thousands of dollars that people invest in timeshares they are only allowed to visit a few weeks out of the year could pay for numerous vacations across the U.S. and abroad. Don’t get trapped into a so-called dream vacation property that could become a nightmare.
Keep Reading: 42 Ways to Save for Retirement
Michael Galvis contributed to the reporting for this article.
