5 Retirement Savings Blunders You Can’t Afford to Make

5 Retirement Savings Blunders You Can’t Afford to Make

To err is human. To retire in comfort is divine. If you’re saving and investing for your retirement, congratulations. You’re off to a great start. But are you making the right moves?

This week, we’re reviewing some common mistakes that can befall even the savviest investors as they craft their retirement savings strategy.

If you see something familiar here, trustA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process. us, you’re not alone. For nearly 25 years, we’ve partnered with clients to create risk-aware, long-term investment plans that work for them. And we’ve encountered each of items we’ll discuss below (and plenty more).

Here’s one: Sensational headlines and political vitriol can overwhelm even the steeliest investment nerves. But pulling out of stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. in favor or bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. or cash to “protect” your account is just one of the mistakes that investors will make when market volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. is high or fear trumps facts on Wall Street.

As we always say, it’s time in the markets, not market timing that will lead to successful long-term results.

So let’s assume you’re invested for the long haul. While everyone’s situation is different and no two investors have the same goals, there are a few common mistakes we come across. Tune out the noise and check out five retirement savings blunders it pays to avoid.

1. Taking a “Hands-Free” Approach

BLUNDER: Ideally, your company’s 401(k) or 403(b) retirement plan offers you a wide range of well-managed, low-cost funds. And there are ample options for building a diversified portfolio. But in reality, many such plans do not offer much choice, let alone funds that won’t take huge bites in fees.

By doing nothing and letting your hard-earned investments languish in an account with limited and overpriced options, you’re unable to fully maximize your retirement savings or implement the most effective strategy for your needs.

SOLUTION: When our clients’ company retirement plans stick them with a dearth of investment options or high fees, we’ll review whether moving their assets to a rolloverThe process of transferring funds from one retirement account to another, typically without incurring a tax. IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age. when they retire is an appropriate choice for them. They get the same tax-free savings and investment power, oftentimes with lower costs and much greater choice.

2. Cashing Out

BLUNDER: You cash out of your 401(k) or (403)b when you retire. Or you opt for a lump sum when you switch jobs. However, taking a lump-sum distribution can be really costly. When you make withdrawals from your retirement plan, you are responsible for paying income tax on the entire value. All withdrawals from a traditional (non-Roth) 401(k) or 403(b) are taxable. And since you made your contributions pretax, the government is going to come after its share of both your savings and the gains you’ve made over time.

If you’re under 59½ years old? Then withdrawals cost you even more. You will be taxed not just on the distributions, but are also subject to a 10% early-withdrawal penalty.

A final cash-out consideration: It’s possible that by taking a lump-sum distribution, you’ll put yourself into a higher tax bracket, making the transaction even costlier.

SOLUTION: You need to be well prepared when contemplating cashing out. First, consider whether it makes more sense to pay taxes on your account now in your current tax bracket. Or, is it preferable to roll your account over into an IRA and pay taxes later in retirement, when you may fall into a lower bracket?

(If you know that you’ll be in the same or a higher tax bracket in retirement, a Roth IRA is worth considering.)

Second, if you do decide to cash out or take that lump sum (or to rollover to a Roth IRA), you’ll need cash on hand for that year’s tax bill. The amount could be quite large, depending on how much you’ve saved up over the years.

3. Relying too Much on Company StockA financial instrument giving the holder a proportion of the ownership and earnings of a company.

BLUNDER: You’ve heard it before: “Don’t put all of your eggs in one basket.” The same goes for investing too heavily in your company’s stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. as your retirement plan. If the unthinkable happens and your company hits hard times or goes out of business, you could face the unwelcome double-whammy of losing both your job and everything you’ve worked so hard to save for retirement in one fell swoop.

SOLUTION: This is not to say that one shouldn’t invest in their company’s in a retirement portfolio. But we advise our clients to keep that portion of their invested assets small enough so that if disaster strikes, their future financial well-being remains secure.

4. Failing to Contribute Enough

BLUNDER: It can be difficult depriving yourself of hard-earned cash in the short-term by contributing the maximum to your 401(k) or 403(b). How much harder will it be to have to look for another job to make ends meet after your so-called “retirement?”

Saving as much as you possibly can while you’re still drawing a paycheck is your best defense against running out of funds after you’ve stopped working. And thanks to compounding, the more you have invested, the greater your potential earnings. This is why we recommend that clients contribute as much as they can to their retirement savings plans.

(Be sure to check whether your company has a matching funds policy, where they’ll match your contribution up to a certain point. If so, by not investing in the company plan, you’re essentially passing up free money.)

Compounding is a powerful investing tool. The more money you have working for you in your retirement account—compounding gains upon gains, year in and year out—the plumper your retirement goose will grow.

The chart below demonstrates the potent investment fuel compounding brings to your savings. In this example, $10,000 is put into a hypothetical investment in the stock market and grows 10% annually over 30 years (roughly the annual return of the S&P 500 over the last three decades). Interest represents the earnings gained on that initial principal invested, a moderate gain. But the majority of the nearly $175,000 after 30 years comes from the ever-increasing earnings made off of previous gains. That’s the power of compounding.

Source: Adviser Investments. Note: 10% rate of return is hypothetical for illustrative purposes. It is not based on historical data or actual investment returns.

5. Investing Too Conservatively

BLUNDER: Stuffing money in your mattress may feel like the safest way to save. Okay, not literally. But this is one of the most common mistakes we see people making when saving for retirement or managing their IRA rollover. The logic, such that it is, goes that because the money they’re putting away is so critical to their future financial security, it should only be invested in risk-free or ultra-safe funds. This painful misconception piles up as the adverse effects of inflation can and will erode the purchasing power of your retirement assets over time.

SOLUTION: To succeed over the long term, we advise our clients to invest a sizable portion of their assets in stocks. There’s no need to take wild risksThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline.. Everyone’s riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. comfort zone is different. But the goal should be to grow a retirement portfolio over time and maintain the “real” value of assets after accounting for inflation.

We understand that this advice could have a short-term, negative impact on retirement savings in a down market. But ultimately, a long-term focus will overshadow shorter-term volatility. Historically, stocks have significantly outperformed bonds and cash, a trend we expect to see continue over meaningful, multi-year or decades-long investment timelines.

About Adviser Investments

Adviser Investments is a full service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., institutions and foundations since 1994, and have more than 3,500 clients across the country and over $6 billion in assets under management. Our portfolios encompass actively managed funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., socially responsible investments and tactical asset allocation strategies, with particular expertise in Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To.

Our minimum account size is $350,000.  To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.