3 Common Retirement Planning Mistakes
Be Aware Of Possible Realities Behind "Common Sense" Strategies
Getting retirement right matters because you want to ensure you have enough money to live comfortably. There are a number of costly mistakes that people can make prior to retirement, some of which you may not even realize you're making. For example, an investment that seemed like a good choice in the moment may prove detrimental to your portfolio's growth down the road. Fortunately, knowing which mistakes to avoid can help you plan for a happy and financially healthy retirement.
Mistake #1: Not Maxing Out Your Retirement Contributions
If you have access to a retirement plan at work and your employer offers matching contributions, it's a mistake to leave what's essentially free money on the table. It’s important to remember that saving pre-tax via your employer’s 401(k) will actually leave you with more in your pockets than if you save on an after-tax basis. The catch, of course, is that you'll be responsible for paying taxes on qualified withdrawals in retirement.
Auto-enrollment has helped increase the number of employees participating at some companies, but in some instances, employees are auto-enrolled at saving rates lower than the amount they would have handpicked. So it's important to be aware of how much you're contributing automatically and take advantage of opportunities to raise your contribution rate. For example, some plans allow you to automatically increase the amount you contribute each year. If you're 50 or older, you may be eligible to contribute additional savings through a catch-up contribution, which would allow you to funnel additional money into your plan.
While it's important to check your automatic contribution rate, it's equally important to be aware of how your 401(k) dollars are invested. Target-date funds, for example, are a popular choice for many plans but they aren't necessarily right for every investor.
Mistake #2: Paying Excess Fees In Retirement Funds
While investing is never going to be free, it's important to be educated about the different fees that can have a big impact on your retirement savings. Here are the most important fees to watch out for:
Mutual fund fees
Speak to your advisor about no-load funds. These funds do not have upfront or back-end fees, nor do they have any barriers to entry or exit. You can also inquire about institutional share classes which generally have much lower annual fees.
Brokerage trading commissions
Years ago, it may have cost a couple of hundred dollars (or more) to execute a securities trade. Now, you can open an online brokerage account and make a trade for less than $10. And in fact, many of the biggest brokerages are now switching to commission-free trading for stocks, mutual funds and exchange-traded funds.
Internal mutual fund operating costs
Mutual fund managers make their living off the fund’s expense ratio. The charges vary from high-priced, “actively” managed funds that seek to outperform the market to index funds that passively track the return of the market.
Markups on bonds and new issue securities
Be aware that advisors at big banks and brokerage firms can sell bonds and stocks from their firms' inventory, mark up the prices when they buy them for you, and keep the difference.
12-b 1 fees
12b-1 fees are marketing fees that mutual fund companies pay to advisors and firms that put their clients in the fund.
Before investing in any mutual fund or exchange-traded fund, review the prospectus first so you have a better understanding of the fees you're paying. And remember that as a general rule, ETFs tend to be more cost- and tax-efficient than traditional mutual funds.
Mistake #3: Borrowing From Your Retirement Savings
In life, you may find yourself in an unexpected financially distressed situation and feel that the only way to get extra cash flow is by taking money out of your 401(k). Or you may need cash for a major home improvement project or another large purchase and decide to tap into your retirement assets using a loan.
While this can put money in your hands at low interest rates, taking out a 401(k) loan isn't always the best choice. For example, taking a loan could trigger tax penalties if it's not repaid on time or if you leave your employer before the loan is paid off. The loan could be treated as a distribution, which would leave you subject to income tax and a 10% early withdrawal penalty.
Also, taking a loan from your 401(k) or making an early withdrawal from an IRA means your money has less room and time to grow. While you can pay yourself back with a 401(k) loan, you can't really do that with an IRA. Money that's taken out doesn't have an opportunity to increase thanks to the power of compounding interest.
Review the terms of your employer's retirement plan with regard to loans before taking money from your account. Specifically, make sure you understand how long you have to repay it, what you'll pay in interest and whether you're able to continue making new contributions to the plan while you have an outstanding loan.
There are a number of additional costly mistakes to avoid in retirement. Among these are taking too much risk, failing to coordinate with a spouse or partner, overlooking inflation, and being saddled with debt, just to name a few.
In addition, don’t forget these five tips that will pave your path to be a happy retiree:
- Start saving early. Remember that a penny saved today is a lot more than a penny saved tomorrow.
- Understand what you need for your monthly budget in retirement above what social security is going to provide, and map out other income streams to “fill the gap.”
- Have a plan to eliminate your mortgage by the time you’re ready to retire.
- Spend wisely. While you may have the funds to buy that fancy new car or a big house, do you really need them?
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.
Internal Revenue Service. "Catch-Up Contributions." Accessed February 26, 2020.