The news on retirement is not good.
It seems like every day there’s a study breathlessly sharing the stark reality of our retirement prospects, or lack thereof. In case you’ve missed them, here’s a sampling.
- Our adult children will probably leech off of us until we’re dead.
- If the kids don’t do us in, long-term-care costs may eat up our retirement fund instead.
- But it might not really matter since a third of us expect to work until we die.
So uplifting, right?
Of course, starting early and saving as much as possible helps. So too does buying 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 golden 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 fund in a high-yield account, CD or under your mattress isn’t going to cut it. Using the latter approach robs you of all that glorious compound interest, while the first two options mean your gains may take a serious tax hit.
Instead, look for specific retirement accounts with tax benefits. A 401(k) offered by your employer or an IRA are the two most common options. However, each comes in two forms: traditional and Roth. To learn the difference, read this article by Money Talks News finance expert Stacy Johnson.
2. Missing out on your employer match
IRAs are fabulous, but if your employer offers a 401(k) match, you need to start there.
According to a survey by American Investment Planners, nearly 60 percent of employers offered matching funds for employee 401(k) accounts in 2011. A more recent study completed by Aon Hewitt found the most common match was dollar for dollar, up to 6 percent of an employee’s 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 of your money in one fund
The 55th Annual 401(k) and Profit Sharing Survey, published by the Plan Sponsor Council of America, reports that the average plan has 19 fund options.
With so many choices, there is little reason to leave all of your eggs in one basket. What’s more, avoid investing all of your retirement funds only in your company’s stock.
Diversity is the name of the game. Spread your money across several mutual funds so in the event one of them tanks, your entire retirement fund doesn’t go with it.
That said, you want to read about the next common mistake before selecting which funds get your money.
4. Ignoring fund fees
Too many workers seem to think their 401(k) is a free investment fund. It’s true you’re not paying out-of- pocket, but it certainly does come with a price tag.
While fee disclosures are getting better, you may have to hunt for the details in the statements of your 401(k) plan. Once you find the fee amounts, you may think they sound small, but watch Stacy Johnson’s video to see how much they can impact your bottom line. For example, if you opt for the fund with the 0.5 percent fee rather than the one with the 2 percent fee, you could have an extra $135,000 at retirement.
In addition to management fees, you probably incur charges every time you transfer money from one mutual fund to another. That’s one of many reasons to avoid changing your investment allocations every time the market hiccups.
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.
The 401(k) and Profit Sharing Survey reports that 89 percent of plans allow loans. When your car breaks down or the roof starts leaking, it can be tempting to turn to your retirement fund for cash. After all, you’re paying interest to yourself when you repay the loan. That’s such a smart money move, right?
The New York City Office of Labor Relations put together a chart demonstrating how a loan will impact your retirement savings. Compound interest is a powerful thing, and when you withdraw money, you are potentially losing out on tens of thousands of dollars or more.
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 a pricey penalty too. 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.
How is your retirement fund looking? Share your best savings tips in the comments or on our Facebook page.