The Do's and Don'ts of Retirement Planning

Planning for retirement can be a daunting task if you don't do your homework to understand all of your options. We suggest finding a financial planner to answer your questions and give you information. If you have a retirement plan through your job, many times you can set up appointments for free to manage your retirement and financial accounts.

We've put together the following list of a few things you should and shouldn't do when getting ready for retirement.

Do's

Look at your investments and review their performance a few times per year. You're looking for consistent performance over time when compared to other investment funds. Only make changes to your portfolio allocations when you have new funds to choose from that are outperforming existing funds or when your existing funds aren't performing the way you expect. A great source to find out about your existing funds and compare them with other funds is Morningstar.com.

Check out new funds that get added to your plan. If you have a 401(k) through your employer, there may be additional funds that become available to you. Many times, your employer will add these new plans to replace older ones that aren't performing well.

Start saving now. If you haven't started planning and saving for retirement, the longer you wait the less money you could have when it's time to retire. Find out about options available to you, talk to friends and family about what they are doing, and meet with a financial advisor.

Set up your plan to match your preferred amount of risk. Don't let investors talk you into allocating your money in accounts with high risk if you aren't comfortable with the risks. If you're not sleeping at night because you're worried about losing money, change your risk so that you're comfortable. The most rewards do come from accounts with high risk, but not everyone can handle that much of a gamble with their hard-earned money. Money market and bond funds are considered to be less-risky than large-cap and small-cap accounts. Your level of risk may also change as you reach different points in your career. When you have more money to lose, it's a good idea to allocate part of it to less-risky investments. Smart401k is a great resource for answering questions based on your risks.

Plan ahead. Plan your retirement date 5-10 years before the actual year that you plan to retire. A lot can happen in the years right before you want to retire and you might need a couple extra years to earn the money you'd like to have for your retirement years. It will be a lot less stressful in the 12 months leading up to your retirement if you give yourself a few years of wiggle room.

Educate yourself. Knowledge is power when it comes to investing in retirement funds. Do research on sites like MSN Money and Yahoo! Finance Personal Finance. If you have trouble figuring things out on your own or you don't have time to do the research, consider hiring an independent service to help you manage your accounts.

Keep track of your expenses. You should keep track of your monthly and yearly expenses for several years so that you know how much you're going to need per month in retirement. We all have different expenses and lifestyles. You will want to plan for living expenses, a vehicle, food, clothing, vacations, and any large purchases you plan to make for retirement.

Remember that every dollar now adds up in the future. Every dollar you put into savings now multiplies because of compounding interest. You can't start saving money for retirement too soon.

Don'ts

Put all your eggs in one basket. You don't want to put all your money in the fund accounts that performed the best the previous year. Last year is in the past, and the diversified approach to investing will give you less risk over time. One of the biggest mistakes uneducated investors make is to change allocations by chasing past success in funds.

Panic because money is down. Because retirement investments are based on the long-term, there will be months and even years where the account may not grow very much interest or even be in the negative. Look at the long-term results of the fund over 5-10 years to get an idea of how much you can earn.

Put too much money into company stock. Many companies offer stock options to employees which sound like a great investment. The success of company stock is dependent on the performance of just one company. In comparison, the mutual funds offer more diversification across several companies in the fund.

Think you are a professional stock trader. Your retirement account isn't something you want to watch every day and make changes to like you're managing a day-trader's funds. Long-term investing takes time and is about the performance over many years, not a few days.

Take all risk out of the equation. If you're so afraid of risk that you can't invest in mutual funds, you may as well just use a savings account which provides very little return on investment. You have time for ups and downs with your retirement account. Set aside a percentage of your retirement account for some of the riskier investments and over the long haul there will be positive growth.

Expect to have a perfect plan. There's never a perfect plan. Lives and circumstances change and your investments will fluctuate up and down. When you think you have the perfect plan, is just when something is likely to go wrong. Plan what you can but expect things to change.

The bottom line is that it's important to start putting money away now for your retirement. If you don't think you can afford to save, start small. Put away 3% of your income each paycheck this year and then add two percent per year until you are saving 15% of your income. Before you know it, you'll have a nice retirement account to get you well on your way.