5 Common Retirement Savings Mistakes to Avoid

Saving enough money to retire comfortably takes diligent planning and smart decisions over decades. Unfortunately, many people make critical mistakes that sabotage their retirement savings. Being aware of the most common pitfalls can help you avoid them and better secure your future nest egg. This article outlines the top 5 retirement savings mistakes you need to steer clear of.

5 Retirement Savings Mistakes to Avoid

Not Starting to Save Early Enough

One of the biggest retirement savings mistakes is delaying getting started. Thanks to compound growth, starting to save in your 20s or 30s allows time for investment returns to accumulate and grow exponentially over time. Every year delayed is growth potential lost.

According to Fidelity, saving just $50 per month from age 25 to 35 (10 years) grows to around $63,000 by age 65, assuming a 6% annual return. Waiting until 35 to start means you’d need to save $198 per month to reach the same amount by 65. The power of compounding makes early savings critical. Don’t wait – start putting retirement money away as soon as possible.

Not Contributing Enough to Get Employer Matching

Retirement Savings Mistakes to Avoid

Many companies offer matching contributions to employee retirement plans like 401(k)s. This complements the money you contribute with “free money” from the employer up to a certain percentage or dollar limit. However, 1 in 5 workers fail to contribute enough to their 401(k) to get the full employer match. This leaves free retirement money on the table. At a minimum, contribute up to your company’s matching limit. Otherwise, you’re giving up part of your compensation package. Don’t overlook this free boost to your savings.

Having Too Much Portfolio Overlap

Building a diversified retirement portfolio is key to managing risk. However, many savers overlap their holdings too much which concentrates risk instead. For example, owning shares of Apple stock directly while also holding an S&P 500 index fund already contains Apple. This redundant exposure doesn’t improve diversification. Also, investing heavily in your company’s stock duplicates risk. Keeping your savings diversified through different assets, sectors, markets, and geographies avoids too much overlap and properly spreads risk.

Ignoring Tax-Advantaged Retirement Accounts

Retirement Savings Mistakes to Avoid

Not taking advantage of tax-deferred or tax-free savings vehicles costs you money. Accounts like 401(k)s, 403(b)s, and traditional IRAs allow you to invest pre-tax dollars which grow tax-deferred. This leaves more money working for you upfront. Roth options don’t offer an immediate deduction but provide tax-free growth. Capturing these tax perks through employer plans and IRAs should be the top priority before taxable investing. Don’t leave ‘free money’ on the table by ignoring these accounts’ tax advantages.

Cashing Out Savings When Changing Jobs

When you leave a job, it can be tempting to take a 401(k) or pension payout rather than rolling it into an IRA. However, cashing out retirement savings triggers immediate income taxes and penalties if you are under age 59 1/2. This damages your portfolio’s growth potential. According to Fidelity, cashing out instead of rolling over a $50,000 401(k) could cost over $21,000 in future retirement money by age 65 (assuming a 6.5% return). Don’t undermine your savings – always opt for a direct rollover when changing employers.

Conclusion:

Avoiding these common big mistakes gives your retirement savings the best chance for growth. Starting early, maximizing employer contributions, maintaining diversification, using tax-advantaged accounts, and always rolling over savings are best practices that keep your retirement plan on track. Being aware of pitfalls allows you to course-correct before real damage is done. With smart moves today, you can avoid retirement savings regrets down the road.

FAQs About Retirement Savings Mistakes

How much should I save each year for retirement?

Saving 10-15% of your income annually including employer contributions is a common retirement savings benchmark. Maximize any available employer matching first before contributing more to IRAs or other accounts.

What is the penalty for early 401(k) withdrawal?

Withdrawals from 401(k) plans before age 59 1/2 face a 10% early withdrawal penalty in addition to owing income taxes on the distributed amount. This penalty is waived for disability, certain medical expenses, and first home purchases ($10k lifetime max).

How often should you review your investment portfolio?

Experts often recommend reviewing your asset allocation and rebalancing your portfolio back to target levels at least annually. More frequent checks may be needed during periods of volatility. But don’t react rashly to short-term market swings.

Can I have retirement accounts with more than one employer?

Yes, you can have multiple 401(k), 403(b), or other employer accounts. You can also contribute to an IRA regardless of whether you have a workplace retirement plan or not. Maximize contributions across available options.

What percentage of my portfolio should be international?

Allocating 20-40% to international stocks helps diversify market risk. Focus on broad index funds covering both developed and emerging markets for cost-effective exposure rather than trying to pick individual country funds or stocks.

A Ahmad
A Ahmad

A Ahmad, a certified financial planner, Retirement Step was created to share over two decades of retirement planning experience with readers looking to take control of their financial futures.

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