One danger, if you get out of equities, is that you'll miss the upturn when markets turn around. That's costly. "History tells us that timing the market this way doesn't work and that you'd be a fool to even try doing it," Stewart says. "So stop stressing out about it. Downturns do end, and if you stay in the market, you'll be there when things turn around."
Another problem with dashing for the cover of "safe" investments is that stocks still offer the surest shot at long-term growth, so conservative investing can take its toll eventually. There's also the lost opportunity of sitting on the sidelines when stocks are cheaper than they used to be. Your 401(k) contributions buy more shares of stocks when prices are lower, so when the markets come back, you'll see a bigger boost.
To forestall knee-jerk reactions when the market dives, allocate your portfolio among stocks—both domestic and international—bonds, and cash. "Set your mix," says Stewart, "and stick with it when it's hardest for you to do so—when the market has fallen for a few days or weeks." Then rebalance annually.
If you're getting close to retirement, or are already retired, the right asset allocation is more important than ever. Sagging markets, combined with pulling funds out for living expenses, can really wreak havoc on your portfolio. At age 65, it's probably smart to put half your holdings in stocks or equity funds and the rest in cash and bonds, then slowly reduce equities to a third of your portfolio by the time you are in your 80s. "There is no magic number," Stewart says. "You need to be comfortable with your risk level, but you still want the growth that stocks can offer over a 10- or 15-year period."
Mistake No. 4: One fast way to undo all your good retirement planning and squash your future nest egg is cashing out your 401(k) balance when switching jobs or being ushered out the door with an early-retirement plan. Even if you don't intend it to be a cash distribution, it might be considered one.
Chances are, when you leave your employer, you'll want to transfer your accumulated retirement savings to a self-directed IRA that offers you more investment choices. But timing is important, and this is where it's easy to get tripped up.
After you receive the funds from your employer plan, you have 60 days to complete the rollover to an IRA or other tax-deferred plan. If you don't complete the rollover within the time allowed or receive a waiver or extension of the 60-day period from the IRS, the amount is considered ordinary income. That means you are required to include the amount as income on your tax return, where any taxable amounts will be taxed at your current ordinary income tax rate. Plus, if you had not reached age 59½ when the distribution occurred, you'll face a 10 percent penalty on the withdrawal.
Mistake No. 5: This is an important error: not creating a post-retirement plan. As you approach retirement, you should know all your sources of income, ranging from pensions to investments to Social Security. Also, consider the amount of equity you have in your home. Then establish a plan for how you'll spend those funds in retirement. In general, you'll want to tap into your tax-deferred savings last.
Failing to plan for life's nasty little surprises can torpedo your retirement plans, even if you've been saving faithfully for years. While it goes without saying that regular retirement contributions are critical, living well in your golden years also depends on far more than a healthy portfolio. "Saving is the heart of it," says Gary Schatsky, a financial adviser in New York, "but you can't ignore insurance, taxes, and debt management."
Most corporate health plans, for example, cover you until age 65, when Medicare kicks in. Retire early (whether you want to or have no choice), and you'll probably need to scout for an individual plan. Your most affordable option may carry a high deductible of $2,500 to $5,000 a year. So plan ahead. Another smart move is paying down your mortgage and slashing your credit card and other consumer debt before you leave the workforce, which will help stretch your retirement savings.