Common Mistakes With Retirement Savings Plans

 

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.