People make
mistakes with retirement savings plans for a number of reasons including lack
of financial knowledge, procrastination, and underestimating future expenses.
Many also don’t review or adjust their plans regularly, leading to missed
opportunities and inadequate savings.
Below is a list of
common mistakes made with retirement savings plans. If you learn what they are,
you can take steps to avoid them.
Not Enrolling
Early- Many
people delay signing up for a workplace retirement savings plan, missing out on
significant investment growth. Even small contributions made early in someone’s
career can grow significantly over time due to compound interest.
Not Contributing
Enough to Get the Full Employer Match- Many employers match a portion of employees’
contributions if employees save first. Failing to contribute at least enough to
earn the full employer match is like leaving free money on a table and walking
away.
Cashing Out When
Changing Jobs- Some
people cash out their 401(k) when they switch jobs and immediately spend the
money. By doing so, they incur taxes and penalties and, more significantly,
forgo long-term growth potential.
Not Increasing
Contributions Over Time- As income rises, many people don’t adjust their retirement
plan contributions. This is another missed opportunity. Increasing savings as
you earn more helps keep retirement savings on track.
Choosing Investments
Without Understanding Them- People sometimes select retirement
account investments blindly or based on what their coworkers select instead of
reviewing past performance, and their individual risk tolerance and goals.
Being Too Conservative
Too Early- Younger investors sometimes avoid stocks
due to fear, opting for bonds or cash equivalent assets. This limits potential
growth early on when they can afford to take more risk because time is on their
side.
Being Too Aggressive Too
Late- Older investors close to retirement sometimes keep
overly aggressive portfolios (i.e., a high percentage of stock), thereby exposing
them to high market risk right before they need to withdraw funds to pay living
expenses in later life.
Not Naming or Updating
Beneficiaries- If you do not name a retirement account beneficiary—or
fail to update it after life changes (like marriage or divorce)—your money
might not go where you intended. It is also smart to name a contingent (“Plan
B”) beneficiary.
Thinking You Have Plenty
of Time- The biggest retirement plan mistake is
procrastination. Many people assume they’ll save "later," and forgo the
awesome power of compound interest for decades. For every decade of delay, the
amount needed to save to reach a goal approximately triples.
This post provides
general personal finance or consumer decision-making information and does not
address all the variables that apply to an individual’s unique situation. It does
not endorse specific products or services and should not be construed as legal
or financial advice. If professional assistance is required, the services of a
competent professional should be sought.
