Some mistakes can’t be undone, whether it’s burning a bridge, ruining an opportunity or sabotaging something you’ve worked for. Nowhere is that more apparent than in planning for retirement. While you can put in the work to make up for significant losses in your retirement account, the money you’ve lost is gone forever. But irrevocable as they may be, making mistakes while planning for retirement is part of the game. The key is to learn from those mistakes and do everything possible to avoid making them in the future. Here are some of the more common mistakes people make in their retirement planning – and how to avoid them.
Paying High Fees
One of the easiest ways to reduce your retirement savings is to invest in funds with high fees. Unfortunately, too many investors aren’t aware they’re paying too much – or that they’re paying any fees at all. This NPR graph showed that a 2% annual fee could decimate your investments by more than half in 40 years. Imagine taking half of what you’ve saved for retirement and giving it up without even knowing you had it. Choosing a fund with a fee of less than 1% will help to ensure you keep more money in your pocket.
Not Checking Your Vesting Schedule
Many employees have a matching schedule with their company’s retirement plan. Unfortunately, some of them fail to note the vesting schedule attached to those retirement accounts. A vesting schedule determines when an employee is eligible for the money their employer has contributed to their retirement account. Each company has their own vesting schedule, some more generous than others. For example, a firm with a five-year cliff vesting schedule means you have to stay at the firm for five years to be eligible for any of those matched funds. If you’re contributing 5% of your income and receive a 5% match but leave before you’re fully vested, it will be as if you’d never gotten that matched money. Make sure to check the vesting schedule, and don’t count on any matched money until it’s safely in your hands. You never know when a better job will come along or a round of layoffs will take away your chance to complete the vesting schedule.
Being Too Conservative
Investing in the stock market can be scary for many people, especially those who suffered during the Great Recession. But being too conservative with your money is also risky, especially if that means avoiding stocks. If you only invest in income funds such as bonds, you won’t earn the returns needed to grow your retirement account significantly. According to CNN Money, stocks have averaged 10% in the past 90 years while bonds have only grown 5%. Once you factor in fees and inflation, your profit with bonds is slim – and not enough to sustain you for 30 years of retirement. It may seem like you’re being cautious and responsible if you eschew stocks, but in reality, you’re just crippling the potential of your retirement fund. Keep in mind that you could unintentionally be sitting on cash in your 401(k) or retirement accounts as well. Just because you’ve transferred money into the account, doesn’t necessarily mean it’s being invested for you. Check your investment option and ensure you’re selecting how your funds should be allocated or manually investing your money as it’s transferred in.
Investing in Individual Stocks
While you need to have stocks in your portfolio to earn enough for retirement, it’s better to have a diverse range of stocks instead of supporting a handful of individual companies. Your risk is heightened if you only have stock in Apple, Facebook, and a few other individual companies – even if those companies are consistently successful. Keep an eye out for low-fee index funds, which can hold hundreds of stocks and provide a better hedge against the market’s fluctuations. Choosing well-regarded index funds is not only easier for you as an investor, but it gives you a broader reach and a bigger probability of high returns.
Letting Lifestyle Inflation Erode Your Savings Power
Hopefully, you’re in a position where your income is growing on a consistent basis, even if it’s in small increments. You probably know when these income bumps or raises are coming and you may even have the money spent before the change is even reflected. A big mistake you can make with your retirement savings is not increasing your savings contribution rate as you get income increases. If you leave your savings rate unaltered as your income is growing, you’re essentially opening the door for lifestyle inflation to creep into your spending plan. Each time you earn a raise or income boost, aim to adjust your savings upward by 1 to 2 percent immediately to ensure some of the extra funds are stashed away and you don’t become used to seeing them in your day-to-day cash flow.