Yahoo Finance 3 Important Ways to Protect Your Retirement Savings
Saving for retirement isn't enough. You also need to prudently invest your savings, and there are plenty of gotchas that will result in a smaller nest egg. A recent report from President Obama's Council of Economic Advisors concluded that inappropriate investment advice is costing retirement savers $17 billion per year. And excessive investment fees are reducing the returns savers could be earning. Here's what you can do to protect your retirement savings:
Get unbiased investment advice. Some investment brokers have a financial incentive to recommend the products and services that will make them the most money, rather than the investments that will produce the best outcome for the client. "There are also financial advisors who received back door payments and hidden fees for steering people into bad retirement investments that have high fees and low returns," said President Obama in a recent speech at AARP. "They might even recommend an investment with worse returns simply because they get paid to recommend those products."
The CEA estimates that conflicted advice leads to returns that are about 1 percent lower each year. If a retiree receives conflicted advice when rolling a 401(k) balance over to an IRA upon retirement he or she will lose an estimated 12 percent of the value of the account while drawing it down over 30 years. "Financial advisers are often compensated through fees and commissions that depend on their clients' actions," according to the CEA report. "Such fee structures generate acute conflicts of interest: the best recommendation for the saver may not be the best recommendation for the adviser's bottom line."
The Department of Labor recommends asking potential investment advisors if they are willing to act as a fiduciary, which means they will be required to recommend investments that are in the client's best interest, not their own. It's also a good idea to find out how your financial advisor is compensated and if that compensation changes based on the investments selected.
Minimize fees on your investments. While the return you earn from an investment is seldom guaranteed, the fees you pay on that investment typically are. You owe fees on your investments regardless of how the investment performs. So, it's important to shop around for funds with the lowest fees that meet your investment needs. Even a 1 percent fee could reduce your retirement savings by a quarter over 35 years, according to White House calculations. A $10,000 investment that would have grown to $38,000 over 35 years would be worth just over $27,500 after paying an extra 1 percent in fees. The CEA says there are several other types of fees to avoid including revenue sharing or 12b-1 fees and front- or back-end sales loads.
Familiarize yourself with retirement account rules. In order to get the maximum possible value from your 401(k) and IRA, you need to follow the rules. Withdrawing money from traditional retirement accounts before age 59 ½ typically results in a 10 percent early withdrawal penalty. If you withdraw $10,000 from an IRA at age 50 and you are in the 25 percent tax bracket, you will only get $6,500 after paying income tax and the early withdrawal penalty on that distribution. After age 70 ½ you are required to withdraw money from your retirement accounts each year. The penalty for missing a distribution is 50 percent of the amount that should have been withdrawn. Withdrawing money from your retirement accounts too soon or too late can both significantly reduce the savings you will have available for spending.
More From US News & World Report
