So You’re Contributing to a 401(k) While Investing and Saving Big – 3 Retirement Mistakes You Can Still Make
Retirement can be an exciting milestone, but it requires thorough planning.
The good news is that 68% of Americans feel confident in their ability to have enough money to live comfortably in retirement, according to a 2024 survey by the Employee Benefit Research Institute.
But it also tells us that nearly a third of Americans have doubts about their ability to live well into their older years.
Don’t miss out
If your goal is to enjoy retirement to the fullest and avoid financial worries, you need to make sure your plan serves your needs. This means avoiding these three possible mistakes.
Contribute only to tax-advantaged accounts
There are many benefits to saving for retirement through an IRA or 401(k) plan. With a traditional IRA or 401(k), contributions up to the annual IRS limit can be tax-deductible and your investment grows tax-deferred.
But if you have all your money in these accounts, you could run into trouble if you decide (or are forced) to withdraw early. In fact, according to Edward Jones, financial advisors across the industry report that 40% of their clients were forced to retire.
But there is a 10% early withdrawal penalty for withdrawing funds from these accounts before you turn 59½. Additionally, withdrawals must be reported as income and taxed when you receive the money. These factors can put you at a disadvantage if your retirement plans change.
With a Roth IRA or 401(k), contributions are made with after-tax dollars, but earnings and withdrawals from investments are completely tax-free. This provides flexibility in case your retirement plans change.
For this reason, it is good to diversify your savings vehicles.
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Choosing high risk investments for higher returns
You may be tempted to build a portfolio of stocks designed to beat the market, that is, giving higher returns than the S&P 500 index.
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But while you want to take some risk when saving for retirement, you don’t want to go overboard. Properly assembling a portfolio of individual stocks takes a lot of time and research. You should also be willing to monitor your investments and rebalance your portfolio from year to year as needed.
For most investors, a more passive approach may be safer, such as investing in broad-based index funds, ETFs or index mutual funds. It’s a low-cost way to invest and you’re getting a diversified portfolio instantly. You are also relying on the power of the broader market to drive you to your goals.
The stock market’s historical return is around 10%, and loading into S&P 500 index funds can achieve similar results. Even if you end up with a slightly lower return—say, 8%—if you invest $500 a month over 40 years, you’ll retire with just over $1.5 million.
A higher-risk portfolio containing individual stocks can leave you with a higher – or much lower – balance. So if you can be happy with returns that mimic those of the broader market, then it’s worth sticking with S&P 500 index funds.
Sacrifice your short-term happiness to save more for the future
“Save now to enjoy life later.” The phrase is often uttered to motivate people to build large retirement nest eggs.
The problem with this mindset is that you don’t know what twists and turns life has in store. So while it’s certainly worth prioritizing retirement savings throughout your career, you also don’t want to sacrifice any other life goals you have just to build wealth for your older years.
A better bet is to set a balance. Sit down with a financial advisor to determine how much you should save each year. Then automate contributions to different accounts to achieve this goal. But from there, give yourself permission to spend some of your money.
You don’t want to give up important moments, like travel or family time, during your working years. Come retirement, you never know if mobility or health issues will prevent you from doing so. So look to the future, but don’t forget the present.
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This article provides information only and should not be construed as advice. Offered without warranty of any kind.
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