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- Don't take early retirement. Many of us dream of retiring at 55 or 60, especially if our current jobs are making us miserable. If you want a risk-averse retirement, forget about it. You will be giving up some of your most productive earning years, significantly cutting into your nest egg. Second, what are you going to do with all that free time? If you stop working at 55, you probably will have 30 or more years of not working. If you're retiring to start a new business, that's a different issue.
- Use retirement plans even if you already have enough money for retirement. With most retirement plans, you can deduct your contributions and the money will grow tax-deferred until you take it out. With after-tax contributions, such as to a Roth IRA, the money grows completely tax-free and you don't have to pay a dollar of taxes when you take money out (and with a Roth, you're not required to take it out at all.)
- Put money in your 401(k) even if you think you'll need to borrow it later. In the meantime, you get a tax deduction for your contributions, which you can invest, and your money grows tax-deferred. Borrowing from a 401(k) isn't a great idea, but saving money always beats spending it. If you borrow from it, you can repay it over five years. Even if you take a distribution (or you leave your job and can't afford to pay back the loan), and you pay income taxes plus the 10% penalty, you're probably better off than not putting money in the 401(k) at all. And hopefully, by then, you will have other funds you can use for a particular goal.
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- Don't pay down your mortgage. It feels great to make extra principal payments on your mortgage, but you should invest that money instead (for example, fund an IRA on top of your company retirement plan). In retirement, the only way you can get to that equity is to sell your house, take a home-equity loan or get a reverse mortgage. Prepaying your mortgage reduces your flexibility at retirement.
- Buy long-term-care insurance. It may be a stretch to make those premiums, but you will probably live a long time in retirement and need custodial or nursing care. Otherwise, if you need care, you may have to use all of your retirement nest egg. See "Your retirement health-care bill: $215,000."
- Don't count on an inheritance. Your parents may have money now, but all kinds of things can happen to eat up their savings and your future inheritance. High medical bills, custodial care or a very long life may mean that you get little or nothing.
Video on MSN Money
When to look for a financial adviserFinancial planner Linda Lubitz Boone tells when you should look for a financial adviser and what one can do for you.
- Don't give money away. It seems like a great tax strategy to give money to your children. But that's money you probably will need at some point in retirement. Don't give money away unless you know you will have much more money than you need. Your children may promise to support you in your old age, but a promise is just a promise.
- Balance your investment strategy with your risk tolerance. Check out MSN Money's Risk Tolerance Quiz to determine whether you can stand a little more investment risk.
Updated Jan. 4, 2008
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