7 tips for stress-free retirement plan investing

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If you're lying awake at night wondering if your 401(k) is properly invested, it's not much comfort to know that millions of other Americans are probably losing sleep over the same thing.

More than half of Americans (52 percent) find explanations of their 401(k) investments more confusing than explanations of their health care benefits (48 percent), according to a poll by Charles Schwab that queried more than 1,000 401(k) plan participants. Nearly half have felt they didn't know their best investment options, and more than a third were stressed out about properly allocating their 401(k) dollars.

It's understandable. Our 401(k) plans were never intended to be a primary path to retirement. They were developed in the 1980s for highly paid corporate executives to shelter additional investments from taxes — a supplement to their companies' old-fashioned pension plans. Only later did companies decide to offer them to employees in place of traditional pension plans.

Although 401(k) plans may not be ideal, they're what many of us have to work with. Here are seven ways to wring the most out of your retirement accounts:

1. At the very least, max out your employer contribution

Find out if your employer matches your 401(k) contribution and, if so, what the maximum contribution is. For example, if your employer matches your contributions dollar for dollar up to 6 percent of your $4,000 monthly salary, you'll get $240 free in your account for the first $240 you save. If you don't take advantage of your employer's match, you're throwing away free money.

Don't stop there, though. If you can, add more to your 401(k). The maximum the IRS allows you to save in a 401(k) in 2016, if you are 49 or younger, is $18,000. Add another $6,000 if you're 50 or older.

Avoid these 13 everyday habits that destroy your retirement fund:

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13 everyday habits that destroy your retirement fund

1. Spending Now Rather Than Saving for Later

It’s much easier to focus on the present than to think about the future, said Erik C. Olson, a certified financial planner with Arete Wealth Management. After all, when bills are due, finding room in your budget to save for retirement might not seem as important.

But if you take a good look at your spending, you likely can find ways to trim the fat so you can set aside more money for the future and actually retire someday. For example, Olson said you could lower your monthly expenses by hundreds of dollars by dining out less, opting for a cheaper cellphone plan, cutting the cost of cable TV — or eliminating it — and getting rid of credit card debt.

“Maybe you’re thinking, ‘Well, that wouldn’t be as much fun,'” he said. But ask yourself how much fun it would be to work the rest of your life because you can’t afford to retire.

The sooner you start saving, the more time you’ll have to grow your money. “What you save and invest in your first five to 10 years can grow to be the majority of your portfolio at retirement, even if you keep saving and investing for decades more,” said Olson. “Compounding growth is that powerful.”

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2. Underestimating How Much You’ll Need to Retire

Maybe you really are keeping your spending under control so you can save for retirement. But, your efforts might not pay off if you haven’t bothered to figure out how much you will need to live comfortably in retirement.

“To avoid being caught off-guard when that day comes, get with a capable financial planner … to get a clearer picture and a plan in place,” Olson said.

At the least, use an online calculator, such as Vanguard’s retirement income calculator or the Fidelity MyPlan Snapshot, to get a general idea of how much you need to save.

Finally: The Magic Number You Need to Retire

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3. Only Investing in the Best-Performing Mutual Funds

Michael Hardy, CFP with Mollot & Hardy, said he often sees people pick the mutual fund in their 401k lineup that has the best performance record, hoping that it continues to climb as it has in the past. It might seem like a logical strategy, but it’s actually a mistake.

“What history shows us is that, over time, the best performers will become the worst, and the worst, the best,” he said. “You may jump in at the top and find yourself getting out of that fund as it is crashing.”

Instead, choose a target-date fund, if your retirement plan offers them. These funds keep your money diversified among stocks and bonds, and get more conservative as you get closer to retirement, Hardy said.

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4. Misunderstanding What Diversification Means

You’ve heard that your portfolio should be diversified. So, as you make your investment choices for your 401k, you might think it’s a good idea to spread your money across the 10 best funds, Olson said.

Those funds, however, might have a good track record because they were invested in the same sort of stocks or bonds that performed well recently.

“What you might have gotten was portfolio concentration disguised as diversification,” he said. So if one starts tanking, they all could, and you’d have a portfolio meltdown.

Avoid this mistake by doing your homework, asking for help from your plan’s advisor and learning how to build a truly diversified portfolio that fits you, Olson said.

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5. Saving Only When the Market Is Doing Well

If you’re only setting aside money in a retirement account when the market is up, it means you’re paying a premium because stock prices are higher.

“This is actually the worst time to put your money into your retirement account,” Hardy said.

Rather than try to time the market, he said you should have a set amount deferred from every paycheck to your retirement account. Increase that amount as you can afford to do so.

Read: 11 Ways You’re Sabotaging Your Retirement

6. Overreacting to Market Volatility

It’s hard not to be tempted to pull all of your money out of stocks when market downturns deal a blow to your retirement savings. But this is one time you need to put the brakes on your emotions.

“It’s easy to get emotional when you turn on CNBC and see nothing but red,” said Shannon McLay, founder of The Financial Gym. “But you need to try to stop yourself before trading in your retirement accounts as a result. Even if you are close to retirement, you need to have patience. As long as you have the right asset allocation and a rebalancing strategy in place, you will be fine in the long run.”

History shows that the markets bounce back, she said. And so will your portfolio. It might mean you have to delay retirement by a few years. But that’s better than cashing out your retirement account after it’s taken a big hit because there’s no way it will bounce back if you’re not invested.

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7. Putting Contributions on Auto-Pilot

You don’t pull money out of your retirement account when the market’s down or only invest when the market is up. You also don’t want to set your retirement contributions entirely on autopilot, said Marguerita Cheng, a CFP with Blue Ocean Global Wealth.

If your retirement plan doesn’t automatically increase your contribution rate annually or you don’t increase it yourself, you might be at risk of not saving enough for a comfortable retirement. Most experts recommend saving at least 10 percent to 15 percent of wages annually.

If you can’t contribute that much, make sure you’re setting aside enough in your 401k to get any matching contributions from your employer. Then, set aside more each year as your income rises.

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8. Making Only Pretax Retirement Contributions

You get an immediate tax benefit by contributing pretax dollars to a 401k, 403b or similar plan because this lowers your taxable income. And contributions to a traditional IRA or SEP can be tax-deductible.

“At first glance, it seems like this approach uniformly would be the smart move, since you’re immediately avoiding taxes, and therefore probably can contribute more,” Olson said.

This approach, however, overlooks the fact that when you withdraw this money in retirement, it will all be taxed as ordinary income. If you think your tax bracket will be higher by the time you reach retirement, it makes sense to invest in a Roth IRA, Olson said. You don’t get an upfront tax break with a Roth IRA, but withdrawals in retirement are tax-free.

9. Not Factoring in Rainy Days

If you’re channeling all of your savings into a retirement account but haven’t set aside money for emergencies, you could be putting your retirement savings at risk. That’s because you might have to raid your retirement account to keep yourself financially afloat if you lose a job, can’t work due to an illness or have a big, unexpected expense.

“To avoid being caught off-guard, develop a rainy day emergency fund to cover the risks you can afford, and put some basic insurance policies in place for the ones you cannot afford,” said Olson. “This can help you not only get through the rainstorm — or hurricane — but may also help you keep your retirement plan closer to being on track.”

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10. Putting Too Much Money Toward a House and Car

If you own a car and house, you’re likely in the habit of making payments for them. But have you fallen into the habit of overpaying by buying more house or car than you can afford? If so, there might not be much room in your budget to save for retirement.

“Cutting your housing and auto expenses by 25 percent will have more of an impact on your long-term retirement savings than if you never bought another coffee or enjoyed a dinner in a restaurant for the rest of your life,” said Vincent Wagner, CFP.

You might argue that if your home is paid off by the time you reach retirement, that’s one expense you won’t have to worry about. But you won’t be able to afford the upkeep, insurance and utilities if you don’t have enough retirement savings.

So, you might need to downsize now to a less expensive home. Or, trade in a pricey vehicle for a used one that you can buy without financing. Then, boost retirement contributions by the amount you’ve saved on housing and car costs.

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11. Paying for Your Kid’s College Education

It’s understandable that you want your child to get the best college education possible.

“But many families overestimate the value of the more expensive schools and underestimate the deterrent to their own retirement savings stemming from either saving for these colleges in advance or saddling themselves with enormous student loans,” Olson said.

Related: Why You Shouldn’t Risk Your Retirement to Put Your Kids Through College

Making it a habit to save for your kid’s education is great if you’re not doing so at the expense of your retirement savings. But if you can’t afford to save for both, remember that there are no loans for retirement.

“And don’t be ashamed or feel like you’re cheating your kids if you impart to them early in life an important lesson about weighing benefits and costs,” said Olson.

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12. Tapping Your Retirement Account for Cash

If you’ve gotten into the habit of tapping your retirement account for cash — to pay off debt, buy a car or make a down payment on a home — you could be putting a serious dent in your savings and taking on a big tax bill.

“First, your retirement savings is now smaller, and you forfeit all the compounding,” Olson said. Then, you’ll have to pay taxes on any withdrawals from a 401k or traditional IRA, and a 10 percent early withdrawal penalty if you’re younger than 59 ½. You can, however, withdraw contributions to a Roth IRA tax- and penalty-free.

If, for example, you prematurely withdraw $25,000 and are in the 25 percent tax bracket, you’d owe $6,250 in federal income taxes and another $2,500 in early withdrawal penalties, leaving you with a net of only $16,250, Olson said. If you had left that $25,000 to grow for another 25 years with a 6 percent annual return, you would have more than $107,000.

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13. Withdrawing Money Too Quickly in Retirement

Your savings might not sustain you through retirement if you’re withdrawing too much each month. If you’re withdrawing more than 3 percent of your nest egg each year, “you may be too optimistic about how generously both market returns and inflation will treat you during retirement,” Olson said.

To ensure your money will last, you might need to scale down your lifestyle expectations. Or, you might need to work more so you can funnel more into your retirement accounts and delay tapping your savings.

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2. Bone up on 401(k) investing

To start, watch this 90-second video primer for beginner investors. Your 401(k) allows you to choose among three types of investments:

  • Stocks: When you see the word "growth" in the title of an investment option within your 401(k), that's a clue that stocks are involved. Stocks, basically ownership in a company, offer the most potential for reward, but they also present the greatest risk.
  • Bonds: When you see "income" as an investment option, you're probably looking at a fund that contains bonds. While stocks are an "ownership" investment, bonds are "loanership." You're lending money to a company (corporate bonds), local government (municipal bonds) or Uncle Sam (Treasury bonds). Bonds pay a fixed rate of interest, come due on a certain date and are backed by the company or government agency that issues them, all things that generally earn them the reputation of being safer and more stable than stocks.
  • Cash: When you see the words "money market," you're probably seeing a fund that's basically a cash equivalent. Like a savings account, these funds don't earn much, but the risk is lower than either stocks or bonds.

3. Decide how much to put in each investment type

Here's a simple rule of thumb: Subtract your age from 100. The figure you get is the maximum percentage you should have in stocks. Say you're 20. You could have up to 80 percent in stocks under this rule of thumb. But if you're 70, keep it to 30 percent because stocks are riskier and, at 70, you have fewer years to make up any losses. You don't want a market downturn just as you're about to retire.

These percentages aren't set in stone. It's just a guide. Adjust up or down to suit your needs and your risk tolerance.

Divide the remaining part of your 401(k) equally between an intermediate (meaning neither long- nor short-term) bond fund and a cash equivalent fund.

4. Keep expenses down

Investment fees can dig deep into your profits. Focus on keeping expenses super low. The best way to do that: Invest in index mutual funds.

"One of the most common indexes is the Standard & Poor's 500, known as the S&P 500, which represents a broad cross section of 500 large American companies," explains CNN. So an index fund is a great way to own hundreds of big companies and, because it requires little management, an inexpensive way as well.

5. Don't stress over timing

No one expects amateurs to know when to buy and when to sell. Even the pros can't seem to get that right. Fortunately, there's no need to worry if you use a simple system called dollar cost averaging: Make your investments in fixed amounts, for example, $100 every month.

This method gives you insurance against market dips because you're buying more shares when they're cheap and fewer when they're more expensive.

6. Forget the experts

Ignore actively managed funds. They're more expensive. They often don't outperform index funds. And they require you to try to figure out which experts you should invest with. While some managed funds have had excellent results, identifying the winners can be a crap shoot. The Los Angeles Times writes:

In the 10 years that ended June 30, $10,000 invested in the average fund that owns a diversified mix of large-capitalization, or blue-chip, U.S. stocks grew to $18,840. But the same amount invested in the Vanguard 500 Index Fund, which tracks the Standard & Poor's 500 index, grew to $20,002 — $1,162 more than the average fund, according to data from financial research firm Morningstar Inc.

After 25 years, the Vanguard 500 Index Fund had accumulated $99,503, a total that's $24,000 more than the average actively managed fund over the same period.

7. Get the lowdown on target date funds

These popular mutual funds are appealing because they take a lot of the work out of investing. You choose the date when you want to retire — 2030, for example — and the fund is supposed to do the rest, rebalancing your investments periodically to meet your goals.

Check out our tips for choosing the best target funds. As this article points out, target funds tend to have relatively high fees, but it's not that hard to emulate one of the better target date funds on your own, cutting the fees in half. Ask yourself if you really need all that expensive professional help.

Are you confident that your 401(k) will produce the money you need when retirement comes? Share your thoughts below or on our Facebook page.

Ari Cetron contributed to this post.

RELATED: 8 mistakes that can sabotage your retirement

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8 mistakes that can sabotage your retirement

Mistake 1: Failing to plan for medical expenses

Medicare kicks in at age 65, but that’s not the end of your medical expenses. Fidelity Benefits Consulting estimates a 65-year-old couple who retired in 2014 will need $220,000 of their own money for medical expenses over the course of retirement. Such costs include deductibles for Medicare Part A and Part B (in-patient and out-patient insurance), and premiums and out-of-pocket costs for Medicare Part D prescription drug coverage.

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Take action:

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Mistake 2: Underestimating costs

Retirement costs can be surprising — surprisingly high, that is. You may find that to manage costs, you need to earn some extra income — not the end of the world, but possibly not what you had in mind. If you do take this path, check the Social Security Administration’s rules for working while receiving Social Security benefits.

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Take action: The good news is, in the emerging economy, it should be easier to find money-making opportunities that fit a retirement lifestyle: There are lots of jobs you can do from home, and lots of ways to earn a little money on the side. If you’re lucky, it may be something you love to do as a hobby — say gardening, tending pets, caring for children or working as a handyman. If you’re in the market for a new job, brush up your resume and skills. Check out “7 Tips to Find a Job in Retirement.”

Mistake 3: Celebrating retiring with a big purchase

No doubt you’ve got a wish list for retirement. But hold off on making major purchases at first. Instead, give retirement a spin and see what you’re spending each month.

Track expenses — every single one. A year’s tracking gives the best picture because it includes one-time and seasonal expenses.

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Take action: It doesn’t matter what tracking system you use. Just find one you like and keep it up. Keep receipts, watch bank and credit card accounts online on a weekly basis, and update your tracking regularly. Here are a few approaches:

  • Try free online budget programs. Money Talks News partner PowerWallet lets you track expenses automatically for free. It and other free money management services like Mint and BudgetTracker make money by recommending financial products and supplying coupons.
  • Pay for a program such as Quicken.
  • Do it yourself. Track expenditures manually and offline on a spreadsheet.

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Mistake 4: Helping out adult kids

Many parents set themselves up for a crisis in retirement by supporting adult children financially. A study by Merrill Lynch says 60 percent of people 50 and older are assisting adult relatives financially.

If you are a parent who gives money to an adult child, remember the following: Adult children still have time to pay off college loans and save for retirement. Their parents — in other words, you — are running out of time to save for the golden years ahead.

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Take action:

  • Make a concrete plan with goals and deadlines for gradually withdrawing financial help from your kids.
  • Discuss the changes with your kids and help them learn to budget.
  • Model financial restraint and responsibility for your kids.

For more tips, read “Still Supporting Your Adult Kids? 5 Steps for Cutting Them Off.”

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Mistake 5: Claiming Social Security too soon

Waiting to claim Social Security benefits is one of the best investments around. If your full retirement age is somewhere between 66 and 67, your benefit check could grow by 32 percent if you wait until age 70 to collect, Social Security spokesman Michael Webb said in an email. If your full retirement age is 67, waiting until 70 yields a maximum possible increase of 24 percent.

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On the other hand, about half of retirees take Social Security at the earliest possible moment — when they’re 62. U.S. News & World Report says:

Social Security benefits are reduced for workers who sign up at age 62, and the amount of the reduction has recently increased from 20 percent for people born in 1937 or earlier to 25 percent for baby boomers born between 1943 and 1954. … The reduction in benefits for people claiming at age 62 will further increase to 30 percent for everyone born in 1960 or later under current law.

This Social Security Administration table shows the reduction for taking early Social Security benefits depending on the year you were born.

Take action:

  • Go to SocialSecurity.gov’s My Account to see your estimated benefits. If you’ve paid into the Social Security system, you can create an account and pull up a statement showing what you’ll earn by claiming benefits at various ages.
  • Keep your current job if you can and delay retirement. Or get a part-time job that helps you hang on longer before claiming benefits.
  • Hire a Certified Financial Planner to review your retirement plan, income and expenses with you.

For more tips on boosting your benefits, head to our Social Security Solutions Center Page, and read “13 Ways to Get More Social Security.”

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Mistake 6: Forgetting about the tax man

The IRS won’t disappear from your life when you retire.

For instance, traditional tax-deferred retirement plans like 401(k)s and IRAs require you to withdraw a minimum amount each year beginning in the year you turn 70½. If you don’t, you could be hit with a big penalty.

You can read more about required distributions at this page of the IRS website.

​Good planning, especially before retirement, can help manage the tax bite. One strategy, Money Talks News founder Stacy Johnson says, is to roll a portion of retirement savings into a Roth retirement plan, which has no minimum distribution requirements. Roth plans require taxes to be paid before money goes in. You withdraw the funds tax-free later. The strategies you use will depend on your income now and what you expect it to be after retirement.

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Take action: Make a plan — or get expert help making one — that takes taxable retirement income into account.

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Mistake 7: Ignoring estate planning

Get your affairs in order before you’re ill or old so you’ll have control over where your money and possessions go. It’s a kindness to your heirs, too, because they won’t be saddled with the work.

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Take action:

  • Make or update your will and, if appropriate, make a revocable living trust.
  • Sign a durable power of attorney naming someone you trust to make your legal and financial decisions if you cannot.
  • Assign health care power of attorney to someone to make your medical decisions if you’re unable.

Mistake 8: Investing too conservatively

As retirement grows nearer, it seems prudent to invest more conservatively. But you could live another 20 or 30 years. Savings held too conservatively shrink because of inflation. A portion of your funds needs to grow.

“Never taking risk means taking a different risk,” Stacy Johnson says.

Take action: Learn about investing so you can be confident in taking measured risks to earn gains, even as you grow older. It’s not difficult to put up the basic rules for sane investing — how spread risk among diverse holdings, how to use index funds as a low-maintenance investment strategy, how avoid paying excessive fees and how to adjust your exposure to risk so that it decreases as you get closer to withdrawing the money.

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More from Money Talks News:
9 Tips Beginning Investors Must Know
9 Tips to Ensure You'll Have Enough to Retire
30 Awesome Things to Do in Retirement

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