By Steven Joshua Samuel, JD MBA, AIF® (June 2010)

With the economy still struggling to gain momentum, the stock market often fluctuating dramatically day to day, and people leading increasingly complex lives, it’s more important than ever to plan carefully for retirement.

Over the past several years it’s become challenging for many families to set aside enough money to live comfortably later on in life; however, there are planning mistakes you can avoid to help increase the long-term effectiveness of your retirement savings.
Here are five of the most common avoidable mistakes when planning for your future:

1. Underestimating the amount you will need during your retirement years
Estimating how much money is needed for a decent retirement lifestyle can seem so daunting that many people don’t even try. Start with a few basic steps by creating a rough estimate of your current expenses by dividing them into two broad categories:

Necessities: Home payment, utilities, taxes, health, auto and home insurance, food, clothing and medical basics and auto related;
Discretionary: Gifts, dining out, travel, recreation, hobbies and luxury items.
After you have created these lists, adjust your estimate for retirement lifestyle changes based on what expenses you know will significantly increase or decrease over the next several years. Otherwise, adjust only for some inflation over a likely 20 to 30 years of retirement. Life expectancy for American men aged 65 is now about 82, and for women it’s age 85, according to the National Center for Health Statistics. Next, read on to review your retirement resources for whether they can sustain the expenses you need.

2. Taking Social Security too early or too late
Social security benefits are at least a part of most people’s retirement resources. There is no mandatory time to take benefits, and many people are uncertain about whether to start receiving social security benefits at early retirement (age 62) or waiting until full retirement (ages 65-67 or later). While there is no single choice that fits everyone, you can make the best decision based on your life expectancy, health, retirement needs, and other retirement savings.

A key factor in determining when to start social security benefits is how much of annual retirement expenses can be met by withdrawals from other retirement resources – pensions and 401k or other savings. For example, a widely used financial industry estimate is 4 to 6 percent per year of total retirement resources that can be withdrawn, so $500,000 could allow for $20-$30,000 per year toward retirement expenses before considering social security.

Consult a trusted financial advisor to help determine when to begin social security benefits and how and when to make withdrawals from other retirement accounts.

3. Making poor choices about which accounts or assets to draw from, when and in what order.
Deciding which assets to sell and when to sell them is both an art and a science. The science is in considering current tax consequences, investment yields and cash flow; and the art is in projecting these issues into future years. For example, withdrawing money first from traditional, taxable IRA accounts has advantages for some people, but taking first from non-taxable Roth IRA accounts may have advantages for others.

For some protection against having to sell investments when prices are low, cash flow projection helps. Cash flow projection of expenses at its simplest is a rough estimate of how much money may be necessary to meet your monthly needs and what is needed for one-time expenses likely to occur during the next five years. It’s best to seek qualified professional advice on planning the timing of withdrawals and related issues.

4. Mistaking diversification for asset allocation
While there is no sure way to protect against market fluctuations or the damage of inflation to purchasing power, asset allocation has proven to be a useful tool. Asset allocation is not simply owning a large number of investments, but rather investing in different asset classes, which tend to react differently to market events – such as large, medium and small companies, US and international, growth and value companies, bonds of various maturities and risk, real estate, cash, and others. Allocations require monitoring from time to time and here again, professional advice is warranted.

5. Being too influenced by news events
Good and bad news, as delivered and often sensationalized by the media, tends to influence high and low swings in financial markets. The inevitable ups and downs in investment markets often compel some investors to make rash decisions. Investing and managing withdrawals to meet the needs of a 20-30 year retirement strategy requires discipline, even during market turmoil, which seems all the more frequent in the past several years. Advice from competent, independent advisors — not biased by how they are paid — will help keep an investor focused on the steps most likely to achieve financial security.

Steven Joshua Samuel JD MBA, AIF® is the founder of the Dedham law firm Samuel, Sayward & Baler LLC and the financial services firm Samuel Financial, Inc. located at 858 Washington Street, Suite 202 in Dedham (781) 461-6886. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network, member FINRA/SIPC, a Registered Investment Adviser. For more information, visit www.samuelfinancial.com.