Saving for retirement should be one of your main financial goals. After all, almost everyone has to stop working someday, and Social Security alone isn’t enough to support you in your later years.
Unfortunately, many people inadvertently make mistakes that compromise their ability to save the nest egg they need. Here are four common mistakes that could leave you with too little to live on in retirement.
1. Missing an employer match
If you have a 401 (k) workplace that provides an employer match, not claiming the full amount of it is a huge mistake. An employer match is literally free money, and it’s the alone chance that you have to earn a guaranteed 100% return on your investment.
An employer match could end up leaving you hundreds of thousands of dollars in extra cash in retirement if you make the most of it every year you work. So ask your plan administrator what you need to do to earn the full amount and do everything in your power to contribute enough to get it.
2. Not taking advantage of tax benefits for retirement
Your employer isn’t the only one helping you save for retirement. The government also wants to subsidize your efforts. In fact, you have options for getting help from Uncle Sam whether you have a job with a retirement plan or not.
This is because there are a number of tax-advantaged retirement accounts you can invest in, including a 401 (k) or various types of IRAs.
When you invest in a traditional 401 (k) or IRA, you get a tax deduction in the year you make the contribution. If you invest $ 1,000 in one of these accounts and you are in the 22% tax bracket, your taxable income decreases by only $ 780. The government basically gives you the remaining $ 220. Although you will eventually be taxed on withdrawals, this grant makes it much easier to collect the nest egg you need.
You don’t want to miss out on this by not putting as much as you can into accounts that come with generous tax breaks.
3. Don’t track the fees you pay
The majority of Americans who invest in 401 (k) do not know what fees they are paying on their account. And the lack of knowledge about investment costs is not limited to 401 (k) s either. It is far too common for people to ignore the management or advisory fees for many different types of investments.
Unfortunately, if you choose investments that have high fees, you reduce your returns and won’t see your money increase that much because of it. And when you invest a lot of money over a long period of time – like you do when you invest for retirement – unnecessary fees can cost you tens of thousands of dollars.
If your 401 (k) has high administrative costs or only offers expensive investments, put enough in it to get the match, then invest elsewhere. And when buying mutual funds, ETFs, or other investments, always pay attention to the expense ratio so you know how much your investment will cost you.
4. Failure to maintain the correct allocation of assets
Finally, far too many people are invested too aggressively or too conservatively. Both are risky, as the former could lead to an inordinate chance of large losses that are difficult to recover from, while the latter could mean your returns are too low to build the nest egg you envisioned.
You could also end up with the wrong mix of investments because you do not take your age and investment schedule into account when deciding how to allocate funds among different assets. Or you could end up with the wrong mix because some of your investments are performing much better than others and you are not taking steps to rebalance your portfolio.
You don’t want to lose on the returns you should be earning, nor do you want to risk ending up with big losses because you have to sell investments at an inconvenient time. Avoid this by checking your asset allocation every year and making any necessary adjustments as you age and your risk tolerance changes.
By being on the lookout for these four common pitfalls, you can maximize the chances that your nest egg will be large enough to provide the security you deserve during your retirement years.
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