Retirement may seem a long way off and far removed from your day-to-day concerns. And yet, this is actually the best time to start planning and saving — that is, when you still have time to accumulate the money you’ll need.
Here are some common mistakes that throw people off course in their retirement planning. Knowing these pitfalls should help you steer clear and save more.
Retirement Mistake #1: Failing to take full advantage of retirement saving plans
If your company’s 401(k) or other qualified employer sponsored retirement plan (QRP), including 403(b) and governmental 457(b), offers a company match (meaning that your employer pledges to match your contribution up to a certain percent of your salary), you have an extra incentive. If you neglect to invest enough to receive the full company match, you’re leaving money on the table. If you get a raise, consider increasing your QRP contribution.
Retirement Mistake #2: Getting out of the market after a downturn
When the market takes a big hit, you may be tempted to pull out all the stocks in your retirement portfolio. If you do, you’ll miss the gains if the market turns around. You want to keep a good mix of asset classes in your portfolio: stocks, bonds, and cash. And once a year, you should rebalance to keep your asset allocation on track.
Retirement Mistake #3: Buying too much of your company’s stock
If your employer's stock shares are an investment choice in your 401(k), you may want to consider keeping your allocation to no more than 10 percent. With your salary already tied to your company’s fortunes, you don’t want a sizable part of your retirement savings to be similarly dependent.
Retirement Mistake #4: Borrowing from your QRP
Many QRPs allow you to borrow from your account. Unless you need the money for an emergency, try not to. Borrowing can be an expensive choice, in two ways:
- Smaller retirement savings: When you take out a loan you are losing the potential for investment growth and that could leave you with a smaller retirement savings. How much smaller? This depends on a number of factors, including the size of the loan, the repayment period, whether you continue contributions during this period, the earnings on your account, and the loan interest rate. Also, if you stop contributing while you are paying back your loan, you won’t receive any employer matching contributions.
- Repayment requirements: If you lose your job or take another one, you’ll have to repay the money quickly, generally by your tax filing deadline. However, if not repaid, the outstanding loan balance is generally subject to income tax and possibly an IRS 10% additional tax for early or pre-59 1/2 distributions.
In addition, cashing out of your 401(k) when you move to a new employer might be costly as well. Know your distribution options when changing jobs.
Retirement Mistake #5: Underestimating the cost and length of retirement
Some crucial factors to take into account:
- Longevity: If you retire around age 65, you could spend a quarter century or more in retirement. Many advisors now urge clients to save enough to last 25 to 30 years.
- Inflation and taxes: Even with relatively mild inflation over the past 25 years, the cost of living has more than doubled. Also consider what taxes you’ll be paying on the money you distribute from your retirement account.
- Health care: Even with Medicare, you could have expenses for supplemental insurance, some prescription drugs, and nursing home care.
- Lifestyle sticker shock: People in retirement generally need at least 80 percent of their pre-retirement income.
Saving enough for retirement?
Find out with My Retirement Plan, an online tool that makes it easy to see if you are on track. After you answer a few questions, My Retirement Plan will calculate your retirement savings goal and recommend personalized next steps.
My Retirement Plan
Products to Consider
- IRA Center
- 401(k) Rollover Center
- Retirement Tools and Calculators
This information is provided for educational and illustrative purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Investing involves risk, including the possible loss of principal. The accuracy and completeness of this information are not guaranteed and are subject to change. Since each investor's situation is unique, you should review your specific investment objectives, risk tolerance, and liquidity needs with your financial professional to help determine an appropriate investment strategy.
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Retirement Professionals are registered representatives of and offer brokerage products through Wells Fargo Clearing Services, LLC (WFCS). Discussions with Retirement Professionals may lead to a referral to affiliates including Wells Fargo Bank, N.A. WFCS and its associates may receive a financial or other benefit for this referral. Wells Fargo Bank, N.A. is a banking affiliate of Wells Fargo & Company.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.
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CAR-0423-04734
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