Saving for retirement can be one of the most stressful things we do throughout our lives. While it’s exciting to imagine your dream retirement, you might worry that you won’t able to meet your goals and make those aspirations a reality.
During a lifetime of saving, it’s easy to sabotage yourself and fall short of your retirement savings goals. For this reason, it’s important to learn about these common pitfalls and create plans to avoid them. If not, you could end up regretting your choices down the road.
A few common ways that retirement savers can sabotage themselves include:
1. Ignoring retirement-related tax breaks.
The government has multiple programs to help you save for retirement and maximize your income after you stop working. These tax breaks help everyone, regardless of whether they are contractors, full-time employees, or even not working at all. Investigate the different types of tax-advantaged retirement accounts available to you. While 401(k)s and individual retirement accounts (IRAs) are the most common, there are other types that may be more appropriate for your circumstances, including accounts with spousal benefits.
IRAs and 401(k)s come in two flavors: traditional and Roth. With traditional accounts, you get a tax deduction in the year you make the contribution, which reduces your tax liability. However, you will eventually pay taxes on withdrawals from the account once you are in retirement. If you believe you’ll make less in retirement, this makes sense, since you’ll be in a lower tax bracket. But if you think you’ll be in a higher tax bracket in retirement, opt for a Roth account. Roth accounts are funded with post-tax dollars but are not subject to taxes at withdrawal.
2. Neglecting an employer match program.
If you are a full-time employee with a 401(k), you may get an employer match. Not making the most of this match is an enormous mistake—it’s essentially free money. It’s your only chance to get a guaranteed 100-percent return on investment, so be sure to prioritize it. Even though the average employer match rate is just 4.3%, it’s not unheard of to save hundreds of thousands of dollars more for retirement, given the compounding interest over time.
Talk to your plan administrator to figure out how you can make the absolute most of your employer match. In addition, ask companies about their match programs when you are applying for jobs. Sometimes, it makes the most sense to a choose a company with a great match over one that offers a slightly higher salary. Not all companies offer a match, so it’s an important point to bring up when discussing compensation in a job interview.
3. Ignoring the retirement account fees.
Many Americans invest in retirement accounts blindly. Unfortunately, these people can end up paying a significant amount of fees. Sometimes, if your account is set up by your employer, you don’t really have a choice. However, you can always transfer balances to different accounts if you feel the fees are you paying are too high. If you don’t know the fees you pay for your account, it’s well past time to take a look. You can get hit with several different fees at once, including both management and advisory fees.
These fees cut heavily into your returns because of the compounding effect. Over a period of years, fees can end up costing you tens of thousands of dollars. For that reason, it makes sense to avoid them whenever possible. If your account has a high administrative fee, pay enough to get the employer match and then look at other options. It’s important to understand that different investments carry different fees, so always look at what your options will really cost you.
4. Making poor investment decisions.
The good news is that don’t need to be an expert investor to make good decisions when it comes to your retirement accounts. For most people, a low fee exchange-traded fund or index mutual fund is a great decision. Avoid opting for the self-directed accounts unless you’re comfortable choosing investments and willing to put in the time and research. If this is the route you choose, beware of “hot tips” that can lead you astray from making decisions with a long-term focus. Most people who choose self-directed accounts opt to get advice from a trusted financial advisor.
Investment decisions also involve deciding how aggressive you want to be with the account, and how you deal with risk. Being too aggressive can cause you to lose money, while being too conservative can stunt growth.
You’ll also need to change your investment allocation over time to ensure your mix reflects your progress toward your savings goals. In general, people become more conservative over time to protect their nest egg as they get closer to retirement, since they have less time to recover from losses. However, this is not the only option. The important thing is to check your asset allocation each year and ensure your accounts are working the way you want them to.