Retirement is not just a far off dream. It is an achievable goal for the majority of Americans. But retirement isn’t a given. You only get one shot at it and it takes hard work and discipline to set yourself up financially so you can enjoy your golden years in style. Here are five costly retirement mistakes to avoid.
1. Waiting too long to start investing. Many people think investing is all about how much you contribute—and the more the better. How much you are able to sock away is important, but possibly more important is when you start investing. Compound interest is one of the most powerful forces in the universe, and you need to take advantage of it. Get started now, and let compound interest work its magic for the next few decades. You might be surprised to find out that with modest contributions and enough time, almost anyone can become a millionaire.
2. Leaving free money on the table. Many employers offer a matching contribution on your 401(k) or similar employer-sponsored retirement plan deposits. If you aren’t contributing enough money to your 401(k) plan to receive the employer contribution, you are missing out on a great benefit.
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3. Cashing out. Making early retirement account withdrawals will derail your retirement plans faster than stopping your contributions. When you take early withdrawals from your retirement plan you will generally have to pay taxes and penalties to the IRS. Depending on which tax bracket you are in, you may end up immediately paying 20 to 40 percent of your withdrawal in taxes and penalties. In addition, you miss out on potential investment and portfolio growth. Early withdrawals are something you should avoid if at all possible.
4. Retirement account loans. Taking a loan from your retirement account is slightly less detrimental to your retirement planning than making an early withdrawal. But it can still cause big problems down the road—particularly if you fail to repay your loan. Taking out a 401(k) loan is essentially borrowing money from yourself, so you aren’t paying high interest rates to a bank. But you are missing out on investment gains and you will pay early withdrawal penalties and fees if you fail to repay the loan. A 401(k) loan is repaid with after tax money, and you have to pay it back immediately if you leave your employer for any reason. The negatives of a 401(k) loan usually outweigh the positives.
5. A poor investment mix. Investment portfolios need nurturing. You should pay attention to your investment portfolio and make sure it has the right mix of stocks, bonds, and other investments. You don’t want your investment portfolio to be comprised of 100 percent cash or to have a majority of your money held in company stock. The best thing to do is create a portfolio that is appropriate for your age and risk tolerance. If you don’t know what that is, consider hiring a financial planner to help you design a portfolio that best fits your needs.