Are You Making These Costly Retirement Savings Mistakes?
Contributing to your employer's retirement plan can help ensure a more secure future. But even the best-laid plans can go horribly astray if you make mistakes.
1. Leaving money on the table
If you've signed up for a 401(k) or similar workplace retirement savings plan, make sure you're taking full advantage of the employer match. Financial experts generally agree: Passing up contributions from your employer’s match is a huge mistake.
2. Allowing your savings rate to stagnate
You can start out small in a retirement savings plan. But don't stop there. As you get pay raises, give your retirement savings contribution a raise, too.
Besides diverting raises, also consider ramping up your contributions in small, regular steps. Some financial advisors recommend contributing at least 10% of your pay to your employer's retirement plan. If that sounds like a lot, remember that the bite isn't as big as it appears.
3. Cashing out when you change jobs
Cashing out retirement funds from a 401(k) or similar retirement account balance can be a bad move for a number of reasons. First, you may pay an early withdrawal penalty of 10% on top of your regular taxes. Worse, you'll lose all your momentum in saving for retirement.
When you leave a job, consider one of these three smart choices:
- Roll the retirement funds into an Individual Retirement Account (IRA). A Rollover IRA gives you more control and investment choices but also requires a bit more attention.
- Move it into your new employer's retirement plan. This can be good, too, but check to see how the investment options there stack up against the choices in your former employer's plan.
- Leave it within your old employer's plan. If you choose this option, remember to monitor the account closely and rebalance periodically.
4. Borrowing from the retirement account
Although some retirement plans will let you borrow against the retirement funds held for your benefit, doing so could reduce your earnings. Taking out a loan may mean taking the retirement funds out of investment options and losing the power of tax-deferred compounding. When you pay yourself back, you'll be replacing pre-tax retirement funds with after-tax pay.
Plus, there's another risk: If you should quit or lose your job while the loan is outstanding, you may have to repay the entire balance due as soon as 30 days after leaving or pay regular taxes and the 10% early-withdrawal penalty on the balance of the loan.
5. Not updating your investment direction
When you're younger and have time to ride out the ups and downs of the market, putting more of your retirement contributions into stock investment options might make sense. But as you near retirement, it can make sense to help preserve your nest egg by considering to direct more of the investment funds toward more stable options. In fact, it makes sense to review your investment options at least every few years to ensure that they match with your goals and tolerance for risk.
You also need to watch for changes in the value of the investment options. For example, if your goal is to have 70 percent of the retirement funds in stock investment options and 30 percent in bond investment options, and the stocks have grown to 90 percent of the investment options, you may want to consider moving some of the retirement funds from stocks to bonds. Many experts recommend rebalancing the investment options annually.
An easier way to consider
If all of this monitoring and rebalancing sounds too complex or time-consuming, you may want to consider a a life-cycle investment option. A life-cycle investment option automatically adjusts to become less risky as you approach retirement.
Take the next step...
Consider increasing your contributions toward retirement! Login to the retirement account at The Principal Retirement Service Center® to increase your contributions to the retirement plan.
While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that The Principal is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
