The news on retirement is not good.
It seems like every month, there’s a study breathlessly lamenting the stark reality of our grim retirement prospects. Millions of Americans barely have one thin dime saved for their golden years.
Of course, starting early and saving as much as possible helps. It also might be wise to buy long-term-care insurance or a life insurance policy with a long-term-care rider.
However, you could do all that and still find yourself running short of money in your post-work years. Here are five common blunders people make with their retirement funds.
1. Not using an account with tax benefits
Not all savings accounts are created equal.
Putting your retirement money in a nonretirement bank account, CD or brokerage account isn’t going to cut it. These options all share a glaring weakness: They offer no tax advantages to the saver.
By contrast, retirement accounts such as 401(k) plans, IRAs and even health savings accounts give you enormous tax benefits. For 401(k) plans and IRAs, you typically have two options: traditional and Roth. With a traditional plan, you can defer taxes now and pay them later. With a Roth, you pay taxes now and defer them forever after.
To find out more about these options, check out:
- “Confused by Retirement Accounts? Roth, Regular IRAs and 401(k)s Made Simple“
- “4 Big Reasons to Make a Roth IRA Part of Your Retirement Strategy“
- “Which Is Better — a Traditional or Roth Retirement Plan?“
2. Missing out on your employer match
IRAs are fabulous, but if your employer offers a 401(k) match, you need to start there.
Many employers offer a dollar-for-dollar match of your savings, up to a certain percentage — such as 6% — of your income.
That means if you earn $50,000 and put $3,000 into your 401(k), your employer will deposit $3,000, too. Other companies might match a different percentage of income or give you 50 cents on the dollar. Regardless of the details, it’s free money. Why aren’t you taking it?
3. Keeping all your money in one stock
When you invest, it’s risky to leave all your eggs in one basket by investing in a single stock. The same goes for investing all your retirement funds only in your company’s stock.
Diversifying is the name of the game. One way to diversify is to spread your money across hundreds or thousands of companies by investing in index mutual funds. That way, if one company’s stock tanks, your entire retirement savings won’t go with it.
4. Ignoring fund fees
Too many workers ignore the high cost of investment fees. As we point out in “Investing Fees: A $400,000 Dilemma That Can Rob Your Nest Egg Blind,” one study found that fees can rob you of hundreds of thousands of dollars in retirement savings.
For more on the high cost of fees, check out “Of All the Fees You Pay, This One Is the Worst.”
5. Using your retirement money like an emergency fund
Finally, it’s a HUGE mistake to think of your retirement money as an emergency fund! Yes, it’s such a big mistake I had to yell.
When your car breaks down or the roof starts leaking, it can be tempting to turn to your 401(k) for cash. After all, you’re paying interest to yourself when you repay the loan. That’s such a smart money move, right?
Wrong! Compound interest is a powerful thing, and when you withdraw money, you are potentially losing out on tens of thousands of dollars or more in compound interest.
Even more concerning for your immediate future is what happens if you have a loan and then leave or lose your job: You need to pay back the balance immediately. If you don’t and you’re younger than 59½, you’ll not only pay income tax on the money, but you’ll also be charged a pricey penalty. I speak from experience: That’s not a bill you want to pay.
Instead of seeing your retirement account as a Plan B for emergencies, open a separate savings account and fill it with enough to pay for three to six months’ worth of living expenses if needed. Then, you can be strictly hands-off when it comes to your retirement fund.
For more, check out “9 Ways to Build an Emergency Fund When Money’s Tight.”
Learn everything you need to plan your dream retirement
The Only Retirement Guide You'll Ever Need gives you the knowledge you need to retire on your own terms. Sure, you can pay a financial adviser, but this online course gives you total control to create a custom retirement plan around the things that make you happy.
You're going to get expert, personalized advice. You'll have access to the latest tools. And when it's complete, you'll be able to approach your retirement confidently and with peace of mind.
It's time to plan the best years of your life. Let's get started.