Retirement Planning Booby Traps

Perhaps you haven't started investing regularly, or the amount you allocate is not enough to reach your retirement goals. Here are a few errors people make that can ruin otherwise good investment goals.

Booby Trap #1: Not viewing debt as negative investment earnings

If you are paying 18% interest on a credit card while earning 8% in an investment, that immediately places you in a 10% loss position. Moreover, where else can you get such a guarantee on your investment return, as you can by investing in your debt repayment? By paying off $5,000 over one year, you'll earn $900 risk-free and you won't have to pay that with after-tax dollars ever again.

Unsecured credit card debt can kill a once-healthy budget, while substantially reducing your income, and opportunities can suffer when your cash flow is crippled by debt. It is harder to solve the need for emergency cash if you are debt-ridden. Especially look at paying down debts that carry interest that cannot be written off as you are paying for both the principal and the interest with after-tax dollars.

Booby Trap #2: Not putting money away into an emergency fund

If an emergency arises you should be able to access a simple bank account to cover three to six months' worth of living expenses such as your rent or mortgage, food, debt repayment, car payments, etc. Failing to have this emergency reserve could, in very extreme cases lead to personal bankruptcy, or at a minimum foreclosure on your home or repossession of your car.

Booby Trap #3: Not assessing your retirement time horizon

You can analyze what you will need to invest annually, by running calculations such as those provided by a number of personal accounting software applications. Confer also with your advisor about how you can get there over your remaining employment years, by investing with a clear vision.

Booby Trap #4: Not investing regularly

The value of compound interest can never be underestimated. As a rule of thumb, your money when invested in a moderate plan can double every seven years. Even a simple investment of $25 per week can compound to nearly $20,000 in 10 years.

There are a number of other significant and potential land mines that can completely unhinge your retirement plans if you are not careful and do not plan correctly.

At the least, you should never trust your own judgment but should seek out the advice and guidance of a licensed financial planner. The amount you invest in their services can pave your way to a smooth and rewarding retirement.