It’s not always a lack of savings that keeps us from enjoying retirement. No matter how much money is in the bank, there are common mistakes savers make that knock their retirement plans off track. Avoid these four mistakes so you don’t sabotage your golden years.
Getting Hit by Early Withdrawal Penalties
There are a lot of rules and penalties involved when withdrawing money from your retirement account before a certain age. It’s important retirement savers understand those rules if they want to keep their retirement plan on track. If you decide to tap into your IRA or 401(k) before age 59½, you will face an early withdrawal penalty. Generally, you will have to include that money in your gross income for the year and will have to pay an additional 10% tax penalty. There are some exceptions to early withdrawal penalties. (For more on that, read How to Avoid the Penalty for Early Withdrawals from Your IRA.) Talk with your financial adviser before deciding to withdraw money from your retirement account.
Missing Out on the Employer Match
A recent survey shows that about one-third of workers are not contributing enough to their 401(k) or employer-sponsored retirement plan to get the full match from their company. The value of a missed match is calculated to be about $750 each year. Although that doesn’t sound like a lot, it can add up to almost $100,000 in missed retirement savings over the course of your career. Double-check with your human resources department to make sure you are getting your full match. And if you aren’t, set a goal to gradually bump up your 401(k) contributions to meet the match threshold. Retirement savers need to take advantage of this free money from their employer.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Living with High Investment Fees
It is important to know how much you are paying for your investments. Investment costs that sound small, like 2%, can eat away at your savings over time. Those fees compound along with your returns. That means you aren’t just losing money in the fees you pay, you are also losing the growth that money could have had. Take this example: If you have $100,000 invested in a retirement account with no costs or fees, and the account has a 6% return each year for 25 years, you will end up with about $430,000. Now imagine that same $100,000 account with a 2% fee each year for 25 years; that will leave you with only $260,000. That small fee wipes out about 40% of your account value. This is why long-term retirement savers need to be aware of their investment fees and costs.
Ignoring Compound Interest
Compounding is one of the best arguments for saving early. On a very basic level, compound interest is earning or charging interest on top of interest. When retirement savers ignore the value of compound interest, they are missing out on growing their money more quickly. If you start saving $5,000 each year at age 25, you could have $1.3 million in the bank by age 65, assuming an 8% return. However, if you waited until you were 35 to start saving $5,000 with an 8% return, your retirement savings would be cut in half. Time is key when letting compound interest work in your favor, and that’s why we need to think long-term when saving for retirement.
How Do We Stay on Track?
Many people believe they can plan for retirement alone, and that might work when you are in your 20s. However, the closer you get to retirement, the more crucial it is that you have a solid plan in place that will keep you on track. The problem is, only one in five people have a written plan for retirement. Your retirement security goes beyond how much you have tucked away in your savings. It relies on a comprehensive plan that will help get you to and through your golden years. Your comprehensive plan should include strategies to pay for health care and a plan for claiming Social Security; it should also include strategies to be tax efficient in retirement and leave a legacy for family and loved ones. Sit down with a financial adviser and talk about your goals. Your adviser will create a plan to help you meet your retirement goals.
-
Stock Market Today: Cautious Investors Let Stocks Drift LowerMarkets weigh encouraging trends for earnings and tariffs against concerning signals from U.S. consumers.
-
A Smart Way to Combat Economic RollercoastersSavings With rates on CDs remaining high for now, a CD ladder allows you to maximize your returns with flexibility to your cash when you need it.
-
Time to Spring-Clean Your Finances: A Financial Professional's Four Steps to Tidy Them UpA midyear review of everything from spending to saving, with adjustments as needed, can set you on track to financial security. Plus, don't forget to check in on your workplace benefits.
-
Why a Law Firm Secretly Recording Client Conversations Is Wrong (and Illegal)A law firm that has been recording client conversations without the clients' knowledge or permission and has threatened employees if they speak out faces legal and ethical challenges.
-
Donating Complex Assets Doesn't Have to Be ComplicatedIf you're looking to donate less-conventional assets but don't know where to start, this charity executive has answers, such as considering a donor-advised fund (DAF) for its tax benefits and ease of use.
-
Think a Repeal of the Estate Tax Wouldn't Affect You? WrongThe wording of any law that repeals or otherwise changes the federal estate tax could have an impact on all of us. Here's what you need to know, courtesy of an estate planning and tax attorney.
-
In Your 50s? We Need to Talk About Long-Term CareMany people don't like thinking about long-term care, but most people will need it. This financial professional recommends planning for these costs as early as possible to avoid stress later.
-
Social Security Pop Quiz: Are You Among the 89% of Americans Who'd Fail?Shockingly few people have any clue what their Social Security benefits could be. This financial adviser notes it's essential to understand that info and when it might be best to access your benefits.
-
Such Attractive Yields in High-Grade Munis Are Rare and May Not Last LongAccording to this munis expert, the last time munis were this cheap was a brief period in 2023. If you kicked yourself for missing out then, you have a second chance now.
-
Financial Analyst Sees a Bright Present for Municipal Bond InvestorsHigh-tax-bracket investors have an excellent opportunity to secure low-volatility, high-quality returns at yield levels rarely seen in over a decade.
