Many people make the five avoidable retirement planning mistakes discussed below. The mistakes are primarily related to participation in a employer-sponsored retirement plan, portfolio diversification, and accessing funds to soon. If you can avoid these errors, your chances of a worry-free retirement will be greatly enhanced.
1. Not participating in your employer-sponsored retirement plan
Most companies offer some sort of retirement plan that you can contribute to. In your company, it might be labeled as a 401k, 403b, 457, or something else. In general, you’re allowed to contribute a certain amount of money to the plan each year.
There are two great things about these plans that many people fail to realize.
– The money will grow tax-free until you begin to withdraw it later in life. Not having to pay taxes on it today means that it’ll have every opportunity to generate the maximum amount of profits on the investments that were acquired with it.
– Most companies will match a portion of the contributions that you make into your retirement plan, up to a certain amount. So if you contribute $1, the company will throw in, as a benefit, an extra 50 cents. It’s a heckuva deal.
2. Inadequate portfolio diversification and poor management
If you manage your retirement investment portfolio like a stock market day trader, that’s not a good thing. Keeping up with the ebb and flow of the stock market is a full time job. And if you’re constantly moving your money around out of fear or to chase rainbows, you’re bound to get burned.
Instead, you should layout a diversified investment plan that matches your risk tolerance level. Then contribute to those investments consistently at least once a month. By doing this, you’ll be able to ignore all of the financial turbulance that’s going on the world.
The nature of the stock market is to flail up and down. But historically, the market has returned an average of about 10% annually. That’s pretty darn good.
Of course, it’s smart to analyze the performance of your investments every year or two and get rid of the dogs. But, in general, you should diversify and remain calm. You’ll be rewarded over the long haul.
3. Dipping your retirement accounts
You’ll find that the rules associated with 401ks and other similar retirement accounts are that you can borrow money from them. For example, if you’re a first time home buyer, you can get money out of your account to make the down payment.
Although borrowing from your account might be permitted, that doesn’t mean it’s wise. And if you discover down the road that you can’t pay back that borrowed money into the account, you’re going get hit with a stiff 10% penalty by the IRS. That’ll be on top of the regular income taxes you’ll owe.
Plus, you’re taking out money that could be earning investment profits that would accumulate significantly over time. So think carefully before taking this step.
4. Not rolling over your retirement account when changing jobs
I’m going to fess up here. When I graduated from university many moons ago, I began contributing to my employer’s 401k plan as soon as I was eligible. I wasn’t making a ton of money, but I contributed at least enough to get all the employer matching dollars.
When I left that job a few years later to take a new job, I had built up a few thousand dollars in the plan. But rather than roll that money over to a new tax-deferred retirement plan, I took that money and spent it on something. I can’t even remember what.
It’s one of the single most dumbest things I’ve ever done in my financial life.
So, I know that getting a chunk of money all at one time can give you a financial high. You might have visions of a new car, vacation, or stereo system bouncing around in your head. But don’t let those voices win out. Do the smart thing and roll that money over to a new 401k plan or Individual Retirement Plan. It’s an easy thing to do, but a CPA or tax accountant can help if you’re not sure how to go about it.
5. Over weighted in company stock
So your company has a program whereby you can buy their stock cheaper than you can get it through a stock broker huh? As a result, you might think it’s a good idea to load up on as much as you can afford. Not so fast, my friend.
For your retirement investment portfolio, you should be well diversified. Company stock should not make up a significant part of your plan.
Now, if you think that your company is the next Microsoft or Apple, and the stock is on fire, it’s probably okay to get a little more. But keep everything in perspective. You’re planning for the long term, and stock prices can swing wildly.
So there you have five retirement planning mistakes you can and should avoid. By simply diversifying your retirement portfolio and not touching it until you reach retirment age, you’ll be part of the winning crowd that enjoys retirement with big smiles on their faces.