5 Common and Costly Retirement Investing Mistakes

5 Common and Costly Retirement Investing Mistakes
Photo by fizkes / Shutterstock.com

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:

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.”

Earn more interest on your savings

Are you earning as much interest on your savings as you could be? Grow your savings faster with banks offering rates that are significantly higher than the national average. Find the best rates and start earning more interest on your savings by using the Money Talks News savings account and CD comparison tool.

Read Next
Top 5 Activities That People Dream of Doing in Retirement
Top 5 Activities That People Dream of Doing in Retirement

No. 1 isn’t visiting grandkids, and No. 4 might surprise you.

9 Things You Should Never Pay For With a Debit Card
9 Things You Should Never Pay For With a Debit Card

Use your debit card for one of these expenses, and you could risk your bank account balance, your credit score or even identity fraud.

15 Ways to Stretch Your Dollars in Retirement
15 Ways to Stretch Your Dollars in Retirement

Getting older presents new ways to save money. Study these strategies to make your golden years more golden.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Comments

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.

Trending Stories