5 Common Retirement Mistakes: How Many Have You Made?
People make many mistakes when it comes to saving and preparing for retirement. You can probably name some of the biggies, like not taking advantage of employer-provided retirement accounts. Here are a few more from Scott Holsopple, managing director of retirement solutions at the Mutual Fund Store.
One of the biggest mistakes people make is not having a retirement plan at all. Holsopple offered a road trip analogy, noting that you'll most likely have a plan before you set out on a trip, knowing which roads you plan to take and what milestones to look for. You might have to make course corrections along the way, but that will be easier if you have done some planning. It's similar with retirement planning: We're not likely to meet our financial goals unless we've taken time to estimate what they actually are and how we'll get there. We need to know, for example, how big a nest egg we want to retire with, how much to sock away in our retirement accounts, and how rapidly we might expect our money to grow.
Underappreciating retirement accounts
Another mistake many make is not realizing how vital their retirement accounts will be. IRAs and 401(k)s, for example, tend to be major sources of retirement income, so it's important to establish retirement accounts and regularly contribute to them. IRAs often offer the most flexibility in terms of investment options, but employer-based plans such as 401(k)s often offer matching funds from your employer. That's free money, so it's smart to meet the full match.
Holsopple noted that the vast majority of folks with retirement plans are not very engaged with them -- for example, they have not initiated a trade in their account in the past year. That may be a sign of disengagement, but it's not necessarily a bad sign. After all, many investors do well by trading infrequently. If your portfolio is full of stocks you bought to hold for many years, then leaving it untouched for a year is not a bad thing at all. But you do need to keep up with your holdings from time to time to make sure they're still on track and that your portfolio's assets are still allocated as you want them. Not keeping up with your portfolio's holdings or its performance is a dangerous kind of disengagement.
The wrong numbers
Another error is fixating on the wrong numbers. For example, many people aim to contribute enough to their employer-based retirement account that they can collect the maximum matching contribution. That's smart, because your employer is offering you free money with the match. But think beyond the sum needed to maximize the match, because the more you can save and invest effectively, the sooner you might retire, and the more comfortable your retirement might be. Another number people fixate on is the rule-of-thumb retirement contribution of 10% of your income. But 10% may not get you where you need to go, especially if you're starting a little late. For many of us, 12%, 15%, or more would be far more effective. If that seems too ambitious and unfeasible, Holsopple recommends increasing your annual contributions by 1 percentage point per year. So go from, say, 8% to 9% this year and 9% to 10% next year, and keep those increases up for a while. If you're daunted, figure out how much the increase represents each week, and it will seem more doable. A 1% increase for someone earning $50,000 per year is just $500 annually, or about $10 weekly. Easy, right?
Poor 401(k) management
Finally, a critical error too many people make is cashing out their 401(k) accounts when changing jobs. Sure, you collect a small or large sum of money, and it's a welcome windfall, but you're also shortchanging your future. Holsopple suggests that if your balance is $10,000 or less, you should take your old 401(k) with you to your new employer. If it's more than $10,000, you might open an IRA with it, which will let you invest in a wider range of mutual funds and gobs of individual stocks.
All of these moves can be easier said than done. Don't balk at the thought of asking -- or paying -- for help. Even a $500 fee can be worth it, if it saves you many thousands of dollars. You can tap a lot of guidance for free, though, in books and on the Web.
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The article 5 Common Retirement Mistakes: How Many Have You Made? originally appeared on Fool.com.Longtime Fool specialistSelena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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