If you are not making retirement savings a priority, you are unfortunately making a big mistake. It's a very common sentiment: retirement is so far away, it's something you can plan for later. Not true. Regardless of how young you are, the time to start is as soon as you are earning income. With the tax incentives and the benefits of compounding over time, your money grows more quickly the earlier you start. If you missed out on starting young, start now at whatever age and just put away a little bit more. When it comes to retirement, ignorance will not lead to bliss.
A 401(k) with an employer match is an employee benefit to feel thankful for—to ignore it is a mistake. Say your employer matches a portion of your contribution up to 6 percent. That's money! A bonus! A raise! Think of it however you want, but if you aren't contributing up to the match point, you are saying no to money.
You have been a 401(k) investor forever. In fact, you don't just have one 401(k), you have five 401(k)s—one for each job you have had since college. Big mistake! Leaving a littered path of 401(k) plans behind you will not help you build retirement savings. You are less likely to pay attention to your investments, asset allocation and fees, and you could be paying a lot of money to multiple funds that are not adding any diversity to your portfolio.
Instead, roll the money out of the old 401(k) and into something new: either the 401(k) at your new employer or a rollover IRA. If the investments in your new 401(k) are diverse and the fees are reasonable, it's not a bad idea to move your old 401(k) money to the new job. It's nice to have your 401(k) nut all in one account. However, if that's not an option, a rollover IRA is easy to open, and it allows you to move all of your career 401(k)s into one consolidated account.
04Getting Nickled and Dimed
Do you pick your investments willy-nilly without understanding what you are paying for them? You are making a mistake. If you pay attention to one thing about investing, pay attention to the fees. Here's what you need to know:
- There are many great mutual funds that are sold without commissions, or loads, you should always choose a no-load option.
- With a mutual fund, the fees are calculated as a percentage of your assets in the fund. It's called the expense ratio, and it should ideally be less than 1 percent (the lower the better).
- Generally, the more expensive funds are actively managed, meaning someone picks the investments in the fund according to his or her own analysis and research. The opposite of active management is indexing. An index fund invests in a select group of companies that represent a portion of the market. Index funds are cheap and they tend to perform as well or outperform actively managed funds. In most cases, you can safely go for the index option.
You can do everything right with your retirement plan, but if you withdraw your money before you reach the proper retirement age (or at least age 59 1/2, which is the minimum retirement age for taking retirement distributions), you will lose a big chunk to taxes and possibly penalty fees. Plus, you miss out on any growing your money might have been continuing to do. That's a mistake.
I know how tempting it is to consider your retirement money when looking for a home downpayment, a way to pay for medical bills or the means to get you through a job layoff. I have considered these myself. But you have to decide and insist that the retirement fund is off limits. That is how you build wealth. A 401(k) loan is an option if you really have nowhere else to turn in a financial emergency, but there are risks. My best advice is to consider that money an inheritance that you don't get until at least age 59 1/2.
The Biggest Retirement Mistakes
If You Want to Retire Rich, Avoid These Retirement Missteps
It is easy to be good at saving for retirement, you just need a bit of confidence and you need to stay clear of some common mistakes. Here's what not to do if you want to save for a successful retirement.