Considering that tax-deferred retirement savings plans, whether a 401k, 403b or IRA will likely provide most of your retirement income, a mistake here or an omission there can be costly. To maximize your retirement savings, by doing things like maximum 401k contribution and such, try to avoid the following mistakes. Don’t:
- Procrastinate. The sooner you get started and the more you contribute, the better your retirement income should look.
- Misjudge your needs. Retirement can last a long time and inflation can double your cost of living 20 or more years down the road. Invest with this in mind.
- Misunderstand your risk tolerance. You won’t know what your risk tolerance is without doing a little homework on your investment time horizon. For a quick risk tolerance quiz check out this one at MSNBC.
- Ignore other risks. Market risk isn’t the only thing that can affect your retirement assets. Credit risk, interest rate risk and not investing enough to meet your minimum retirement income needs can all derail your retirement goals.
- Neglect to maximize your employer match. If your employer matches a portion of your contributions, you’re throwing money away by not taking full advantage. Contribute at least the maximum amount your employer will match if possible.
- Try to time the market. After the bull market of the late 90’s and then the subsequent decline in the three years following, it should be clear that few people can consistently predict the market’s direction. A long-term approach that matches your investment time horizon to your retirement goals is your best option.
- Forget to rebalance. Your portfolio’s asset allocation can shift when one asset class does well and another doesn’t. Review at least annually and rebalance if needed.
- Take early distributions. If you take a distribution from your retirement savings plan before you turn 59 1/2, you’ll owe a 10% early withdrawal penalty from the IRS in most cases, and that is in addition to income taxes which will deplete your retirement nest egg even faster.
- Apply for frequent loans. Some retirement plans allow you to take loans of up to 50% of your account’s assets. Consider other options before taking a loan so you don’t take away from one goal to fulfill another.
- Ignore the details. Have you looked at your beneficiary designation lately? Review your designation annually to be sure your loved ones are protected. Also take this time to examine the expenses and other fund details which may change over time.
- Pass up a direct rollover when you change jobs. Even if you plan to reinvest your retirement assets on your own, if you take a distribution that is not classified as a direct rollover your employer is required to withhold 20% for taxes. If you leave your employer, use a direct roll over to transfer your retirement account to an IRA or into your new employer’s retirement plan.
- Take a lump sum at retirement. If you keep your distribution, your income tax bill that year could be staggering. Instead choose to move funds from employer plans into an IRA to maintain tax-deferred status.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
NO, NO, NO!!!
The 401k/457b/403b is a scam until you've maxed out an IRA. If you plan on retiring with the MAJORITY of your 401K/457b/403b doing the heavy lifting you may think twice. You need ten, "10" times the yearly income of your last year in work to meet the basic necessities of retirement. So if you make $65K a year that's $650K or $26K a year for 25 years. Problem is the make contribution is only $15.5k... Do the math, the public has been scammed by the financial engineers of Wall St. and corporate America.
Great tips! I think people blindly think that dumping money into their 401K and forgetting about it without managing it properly will guarantee them fiscal success later on.
Thanks for reminding us that is not the case.
very interesting article, it is like chewing 12 sweet toffees, a reader commented on 13th mistake as well. Good
Well loans aren't the worst option, but it is often too easy to get a loan and then the repayment plans are painfully slow. On some plans, as long as 10 years. So while someone may only borrow say $5,000, if you spread repayment back over the course of 5 or 10 years you have missed out on a lot of potential compounding.
What is even worse is that many employees, at least those who are younger rarely stay with the same company for extended periods of time. These people who take out loans and then leave the company before it is repaid more often than not I see people not repaying the loan and then taking the tax hit. Then not only did they miss out on growth, but they effectively took an early withdrawal.
And I thought about what you suggested for 13, but since it is about a 50/50 chance of being a mistake I didn't put it in. In some cases you certainly end up rolling your money into a new employer plan that does have high fees and not as many options, there are many other cases where this may not be the case, especially if moving to a large organization.
Larger companies typically work with companies like Fidelity, which offer many great low-cost options or offer what are typically load funds as institutional funds which have no loads and can have low fees. Of course this varies greatly by plan, which is why anyone changing jobs should throughly research their new plan to be sure they make the right decision.
I read that taking loans from your 401K (as long as you can pay them back) isn't the worst plan. I wouldn't do it, but the argument is that it is effectively interest-free. Yeah, you lose the market opportunity, so that's the cost.
Moving your old plan to your new employer's plan would be my 13th mistake. Why not have the most investment options possible and move it to an IRA. Sometimes employer's plans have heavy fees.