5 Mistakes That Will Sink Your Retirement

As you near your goal, avoid these poor choices.

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At 60, Diane Fuchs knows a little bit about investing for retirement. The Washington, D.C.-based employee benefits attorney has a 401(k) plan, a mix of IRA accounts—and a good sense of discipline about protecting her retirement funds.

Yet six months ago, worried about a tumbling stock market, Fuchs anxiously considered selling off all the equities in her accounts and putting the money into safer securities. She figured she'd safeguard her savings from plummeting share prices, then get back in once the dust settled.

Fuchs is not alone. Planning for retirement is discouraging these days. Even people with stable jobs face swelling gas prices, utility bills, health insurance premiums, and other expenses that make extra cash for retirement elusive. With distractions like a turbulent stock market and a shaky economy, it's easy to take your eye off the ball and forget your ultimate financial goals. Here is a look at five retirement planning mistakes you absolutely need to avoid.

Mistake No. 1: The biggest blunder is cutting back on contributions to a 401(k) plan, since most companies offer matching funds—the ultimate cash freebie. In general, 401(k) plans are set up so that the employer adds 50 cents to each dollar a worker contributes, typically up to 6 percent of the worker's salary. That's an immediate 50 percent return on investment. Yet nearly one quarter of American workers don't contribute to their 401(k), according to the Profit Sharing/401k Council of America, a nonprofit association. And of those who do contribute, many don't toss in enough to get the full company match.

If you are nearing retirement, don't make the mistake of easing off your savings. It's time to juice them up. Many older boomers didn't save as much as they should have in the early days of their working lives. The cost of the kids' braces, tennis lessons, and college tuition understandably took a toll on personal savings. The thought of contributing 10 percent of gross income, let alone 15 percent, was a pipe dream.

But it's not too late. From age 57 to 65 is typically the peak earnings time for most people. "This is when you can do some extraordinary saving," says financial planner Mary Malgoire, president of the Family Firm. "You're finally freed up to focus on socking it away for retirement. It's now or never."

And the IRS will lend a hand. If you are 50 or older, you can make catch-up contributions to your workplace savings plan and IRA. This year, while most workers are eligible to defer up to $15,500 to a 401(k) plan, those eligible for catch-up contributions can toss in an extra $5,000. Employers are not required to provide for catch-up contributions, but most do. The same catch-up provisions apply to 403(b) plans, 457 plans, and SAR-SEP retirement accounts. You can also contribute an extra $1,000 to a traditional or Roth IRA. So, while younger savers can put $5,000 a year into an IRA, people 50 and older can save $6,000.

Mistake No. 2: Using your retirement money as a bank is a major no-no. Yes, it's reassuring to know you can always borrow from your 401(k). But even when times are tight, that's bound to be trouble. If you take a loan and then get laid off or bought out, you'll probably have to pay back the loan right away. If you can't repay the loan, it will be treated as an early withdrawal. That means you'll owe income taxes, plus a 10 percent penalty.

Even if you do pay back the loan, it's a bad idea to tap your retirement funds. After dipping into the account once, you've crossed a psychological line and might be more inclined to do it again. Plus, by withdrawing funds, you sacrifice compounding investment earnings.

Mistake No. 3: When you see your retirement account balances falling, it's reasonable to want to avoid losses by reinvesting in safer bets, as Fuchs contemplated. Don't. As gut-wrenching as it might be, it pays to hold your ground. "Managing your retirement money has nothing to do with predicting the markets," says Susan Stewart, president of Charter Financial Group in Bethesda, Md. "Moving money from stocks into more stable investments like money funds or CDs to avoid losses and ride out the downturn assumes you have a special crystal ball."