Retirement. It’s a word that evokes a mix of excitement and anxiety. For many, it represents well-earned relaxation. But for others, retirement feels like a looming financial cliff.
The truth is, a comfortable retirement requires careful planning and strategic investment. Unfortunately, common missteps can easily derail your financial goals.
Here are some of the most common mistakes people make when it comes to their retirement accounts. Understanding these pitfalls is the first step toward avoiding them.
7 big mistakes people make in their retirement accounts
It’s easy to understand why retirement missteps are so common. Our lives are busy juggling work, family and personal commitments, so financial planning often takes a backseat. Add to that the overwhelming amount of information — some accurate, some misleading — and it’s no wonder many people feel lost.
Here are seven of the biggest mistakes people make with their retirement accounts, according to experts, along with solutions and strategies to help you bypass failure on the road to retirement.
1. Not contributing more to your account — regardless of the company match
Contributing enough to snag the full match from your employer workplace 401(k) or similar plan should be a no-brainer. Most employers offer either a 50 percent match on the first 6 percent of contributions, or a 100 percent match on the first 3 percent and then 50 percent on the next 2 percent (for a 4 percent total match), according to a 2022 study by Vanguard.
It’s essentially free money for your future, and who can argue with that?
But if your employer doesn’t offer a match, don’t let that stop you from investing, says Stephanie Genkin, a certified financial planner and owner of My Financial Planner LLC in Brooklyn, New York.
After all, not all employers offer a company match. In fact, a third of private civilian workers (33 percent) in 2023 didn’t have access to any employer defined contribution plan, such as a 401(k) or 403(c)(b), according to the Bureau of Labor Statistics.
“You need to save for retirement whether there’s a match or not,” says Genkin. “The automated nature of going straight from your paycheck to your selected investments is an important feature.”
Even if your company offers a match, it often only amounts to about 3 to 5 percent. Most financial experts recommend saving 15 to 20 percent of your salary for retirement, so contributing only enough to get the match may cause you to fall short of your long-term savings goals.
2. Ignoring your account until you’re in your 50s
It’s easy to neglect your savings when retirement is decades away. Other financial priorities — such as buying a home or paying off debt — often take priority, so it’s easy to put off contributions until later.
But when later eventually arrives, many people panic at their low retirement account balances, says Genkin.
“They wind up kicking themselves that they didn’t pay more attention to what was going on or seek advice early on to help them accumulate a bigger nest egg,” she says.
Delaying contributions can dramatically impact your future financial well-being. The power of compound interest is a beautiful thing, but it needs time to work its magic. The earlier you start investing, the more time your money has to grow.
Genkin recommends increasing your retirement contributions by 1 to 2 percent annually until you hit the IRS maximum. That cap increases each year for inflation, and in 2024, the maximum contribution limit for a 401(k) is $23,000 a year, with an additional $7,500 catch-up contribution for those 50 and older.
By starting small in your 20s then gradually bumping up contributions as your salary increases in your 30s and 40s, you can avoid unpleasant surprises in your 50s.
Identifying a savings target during your working years is also helpful, says Scott Oeth, a CFP and principal at Cahill Financial Advisors in Edina, Minnesota. Enlisting professional help is another smart move.
“Following a financial plan, even a rudimentary one, is a tremendous aid in achieving retirement goals,” says Oeth. “I think many DIYers don’t put much thought into how much they need to save, so they end up at retirement age with whatever they end up with.”
3. Investing too aggressively
Your age plays a major role in determining the appropriate level of risk for your investment portfolio. People investing in their 20s and 30s have a longer investment horizon, which allows them to weather market fluctuations. They can afford to be more aggressive with their investments, leaning heavily toward stocks, which historically have netted higher returns over the long run.
But as you approach retirement, your portfolio should generally shift to more conservative investments. Fixed income investments like bonds and certificates of deposit, which generally offer steadier returns, become a bigger part of your portfolio. This is because you have less time to recover from losses and preserving your nest egg becomes a priority.
“You don’t want to try to play catch up by being more aggressively invested when you’re in spitting distance from leaving the workforce,” Genkin says. “You could inadvertently undermine your retirement savings in the event of a prolonged market downturn.”
Another pitfall is assuming the good times will last forever. Maybe you’ve enjoyed great returns from your stock-heavy portfolio over the last 20 years. That’s fantastic — but it’s still important to diversify, says Oeth.
“People who’ve made big money during boom year cycles may stick with volatile portfolios, then be whipsawed by a downturn and the need to pull out funds for retirement living expenses,” he says.
For those who’ve fallen behind on retirement savings, increasing contributions as much as possible while still maintaining a balanced portfolio appropriate for your age is a good approach to take, according to experts. Consulting with a financial advisor can help you develop a personalized plan to maximize your savings potential without taking unnecessary risks.
4. Or investing too conservatively
On the flip side, investing too conservatively when you’re young can also put your retirement account at risk.
Stocks historically outperform bonds over the long term. So if you avoid stocks in favor of safer but lower-yielding investments during your working years, you’re potentially missing out on substantial growth opportunities.
Additionally, a conservative investment strategy may not generate sufficient returns to meet your long-term financial goals, says Joe Conroy, a CFP and owner at Harford Retirement Planners in Bel Air, Maryland.
“Getting too conservative will make it difficult to keep up with inflation and income needs in retirement,” he says. “Unfortunately, people won’t realize this mistake until halfway through retirement, usually when going back to work isn’t an option anymore.”
5. Lack of tax diversification
Relying solely on traditional IRAs or 401(k)s can lead to a hefty tax bill in retirement. While these accounts offer great up-front tax breaks, ordinary income tax rates on withdrawals can take a bite out of your nest egg later on.
“Most folks enter retirement with a bulk of their assets in company pre-tax accounts, leaving little room for tax planning,” says Conroy. “It’s best to spread money around to taxable and Roth accounts, in addition to pre-tax 401(k)s and IRAs.”
A Roth IRA or Roth 401(k) offers tax-free withdrawals in retirement, which can be a game-changer. A combination of traditional and Roth accounts can provide some much-needed flexibility and help manage your tax burden in retirement.
A Roth IRA also avoids a major downside of traditional retirement accounts — required minimum distributions (RMDs) — which begin at age 73.
“This is basically the IRS forcing people to withdraw money from those accounts, even if they don’t need or want to,” says Sean Williams, a CFP and principal at Cadence Wealth Partners in Concord, North Carolina.
Williams adds: “It also means their beneficiaries are going to one day inherit the tax burden and distribution requirements for those traditional retirement accounts.”
6. Not having a clear distribution strategy
Having a well-defined plan for withdrawing money from your retirement accounts is crucial. Without a strategy, you risk outliving your savings.
Williams says he’s met with many clients who aren’t sure where to start when it comes to creating a retirement withdrawal strategy.
“Like scaling Everest, most of the accidents happen on the way down,” he says. “Distribution planning is substantially more complex than accumulation planning.”
Williams recommends meeting with a financial advisor and asking the following questions:
- Which accounts should I draw from and in what amounts?
- How do I control my tax bill?
- What do I do during a down market?
- How does inflation erode purchasing power?
- Which accounts are more advantageous to leave behind to loved ones?
When developing your distribution plan, consider factors such as your expected expenses, Social Security benefits and RMDs. There are numerous types of withdrawal strategies out there, including the 4 percent rule and the bucket approach, which involves dividing your retirement savings into different pots for short-, medium- and long-term expenses.
7. Not planning for the psychological challenges of retirement
Retirement is more than just accumulating a nest egg — it’s a major life transition. Many people overlook the psychological challenges that come with leaving the workforce, and a regular paycheck, behind.
“If you take someone who spent the last 40 years receiving a check on the 1st and 15th of each month, and that’s suddenly shut off overnight, it can create a bit of a mental crisis,” says Williams.
Even if you have more than enough savings, it can be challenging to replicate the consistency and security of a steady paycheck. Social Security benefits and annuities, when appropriate, can make up for part of that missing element.
But Williams has another solution to help soon-to-be retirees avoid paycheck paralysis.
“Something as simple as a cash management account that automatically deposits what they need into their bank account monthly does wonders to remove anxiety and fear during that transition period,” says Williams.
Bottom line
Saving for retirement can be complex, but understanding common pitfalls is a good way to avert ugly surprises later. By starting early, diversifying investments and creating a comprehensive plan, you can increase your chances of a comfortable retirement. You can start taking proactive steps today to educate yourself about retirement planning, and consider speaking with a financial advisor to help you map out a personalized plan tailored to your specific needs.
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