Retirement. This word triggers a mixture of excitement and fear. For many, it means well-deserved relaxation. For others, however, retirement feels like a looming financial abyss.
The truth is that a comfortable retirement requires careful planning and strategic investments. Unfortunately, common missteps can easily derail your financial goals.
Here are some of the most common mistakes people make with their retirement accounts. Understanding these pitfalls is the first step to avoiding them.
7 big mistakes people make with their retirement accounts
It’s easy to understand why poor retirement planning decisions are so common. We’re so busy juggling work, family and personal commitments that financial planning often takes a back seat. Add to that the overwhelming amount of information available – some of it accurate, some of it misleading – and it’s no wonder many people feel lost.
Here are seven of the biggest mistakes people make with their retirement accounts, according to experts, along with solutions and strategies to help you avoid failure on the road to retirement.
1. No higher contributions to your account – regardless of the company share
Contributing enough to secure the full match from your employer’s 401(k) or similar plan should be a breeze. According to a 2022 study by Vanguard, most employers offer either a 50 percent match on the first 6 percent of contributions or a 100 percent match on the first 3 percent and then 50 percent on the next 2 percent (for a total match of 4 percent).
It’s essentially free money for your future, and who can say no to that?
But if your employer not “If you offer a subsidy, don’t let it discourage you from investing,” says Stephanie Genkin, a certified financial planner and owner of My Financial Planner LLC in Brooklyn, New York.
Finally, not all employers offer company participation. In fact, a third of private civilian workers (33 percent) had no access to any employer-defined contribution plan such as a 401(k) or 403(c)(b), according to the Bureau of Labor Statistics.
“You need to save for retirement whether there is a match or not,” says Genkin. “Automatic routing from your paycheck to your chosen investments is an important feature.”
Even if your company offers a match, it’s often only about 3 to 5 percent. Most financial experts recommend saving 15 to 20 percent of your salary for retirement, so if you only contribute enough to get the match, you may not reach your long-term savings goals.
2. Ignore your account until you are in your 50s
When retirement is decades away, it’s easy to neglect your savings. Other financial priorities – like buying a home or paying off debt – often take precedence, making it easy to put off making contributions until later.
But when the time finally comes later, many people panic about the low balances in their retirement accounts, Genkin says.
“In the end, they regret not having paid more attention to what was going on or having sought advice early on to build up a larger financial cushion,” she explains.
Delaying deposits can have a dramatic impact on your future financial well-being. Compound interest is a beautiful thing, but it takes time to work its magic. The sooner you start investing, the more time your money will have to grow.
Genkin recommends increasing retirement savings contributions by 1 to 2 percent annually until you reach the maximum amount set by the IRS. That cap increases each year due to inflation, and in 2024, the maximum contribution limit for a 401(k) plan will be $23,000 per year, with an additional $7,500 catch-up contribution for those age 50 and older.
By starting with a small amount in your twenties and then gradually increasing your contributions as your salary increases in your thirties and forties, you can avoid unpleasant surprises in your fifties.
It’s also helpful to set a savings goal during your working years, says Scott Oeth, CFP and principal at Cahill Financial Advisors in Edina, Minn. Seeking professional help is another smart move.
“Following a financial plan, even if it’s rudimentary, is a huge help in reaching retirement goals,” says Oeth. “I think a lot of do-it-yourselfers don’t give much thought to how much they need to save and end up with whatever they end up with when they retire.”
3. Investing too aggressively
Your age plays an important role in determining the appropriate level of risk for your investment portfolio. People in their twenties and thirties have a longer investment horizon that allows them to weather market fluctuations. They can afford to be more aggressive in their investments and focus heavily on stocks that have historically produced higher returns over the long term.
However, as you approach retirement, you should generally shift your portfolio toward more conservative investments. Fixed-income investments such as bonds and certificates of deposit, which generally offer more stable returns, will make up a larger portion of your portfolio. This is because you have less time to recover from losses and preserving your nest egg becomes a priority.
“You shouldn’t try to catch up by investing more aggressively when you’re about to retire from the workforce,” Genkin says. “In the event of a prolonged market downturn, you could inadvertently undermine your retirement savings.”
Another trap is assuming the good times last forever. Maybe you’ve had great returns on your stock-heavy portfolio over the past 20 years. That’s fantastic – but it’s still important to diversify, says Oeth.
“People who made a lot of money in boom years may hold on to volatile portfolios and then get thrown into a tailspin by a downturn, forcing them to withdraw money for retirement living expenses,” he says.
For those who have fallen behind on retirement savings, experts say a good approach is to increase contributions as much as possible while maintaining a balanced, age-appropriate portfolio. Consulting with a financial advisor can help you develop a personalized plan to maximize your savings potential without taking unnecessary risks.
4. Or invest too conservatively
On the other hand, investing too conservatively at a young age can also jeopardize your retirement account.
Stocks historically outperform bonds over the long term, so if you avoid stocks in favor of safer but less profitable investments during your working years, you may be missing out on significant growth opportunities.
In addition, a conservative investment strategy may not produce enough returns to meet your long-term financial goals, says Joe Conroy, CFP and owner of Harford Retirement Planners in Bel Air, Maryland.
“If you’re too conservative, it’s going to be difficult to keep up with inflation and income needs in retirement,” he says. “Unfortunately, people don’t realize this mistake until mid-retirement, usually when returning to work is no longer an option.”
5. Lack of tax diversification
Relying solely on traditional IRAs or 401(k)s can result in a heavy tax bill in retirement. While these accounts offer big tax breaks up front, regular income tax rates on withdrawals can eat into your nest egg later.
“Most people retire with the majority of their wealth in tax-free corporate accounts, leaving little room for tax planning,” says Conroy. “The best thing to do is spread the money across taxable and Roth accounts, in addition to tax-free 401(k)s and IRAs.”
A Roth IRA or Roth 401(k) offers tax-free withdrawals in retirement, which can be a critical advantage. A combination of traditional and Roth accounts can provide much-needed flexibility and help you manage your tax burden in retirement.
A Roth IRA also avoids a major disadvantage of traditional retirement accounts – required minimum distributions (RMDs) – which begin at age 73.
“Essentially, the IRS is forcing people to withdraw money from these accounts even if they don’t need to or want to,” says Sean Williams, CFP and principal at Cadence Wealth Partners in Concord, North Carolina.
Williams adds, “It also means that their beneficiaries will one day inherit the tax burden and withdrawal requirements on these traditional retirement accounts.”
6. No clear sales strategy
It’s important to have a clearly defined plan for withdrawing funds from your retirement accounts. Without a strategy, you risk falling short of your savings.
Williams says he has met many clients who are unsure where to start when developing a retirement strategy.
“Like climbing Mount Everest, most accidents happen on the way down,” he says. “Distribution planning is much more complex than accumulation planning.”
Williams recommends meeting with a financial advisor and asking the following questions:
- From which accounts can I withdraw and how much?
- How do I control my tax burden?
- What do I do during a market downturn?
- How does inflation affect purchasing power?
- Which accounts are best to leave to your loved ones?
When developing your distribution plan, consider factors such as your expected expenses, Social Security benefits and RMDs. There are numerous types of withdrawal strategies, including the 4 percent rule and the bucket approach, which divides your retirement savings into different pots for short-term, medium-term and long-term expenses.
7. Not planning for the psychological challenges of retirement
Retirement is more than just saving for a nest egg—it’s a major life transition. Many people overlook the psychological challenges that come with leaving the workforce and a regular salary.
“If you take someone who has been getting a check every 1st and 15th of the month for the past 40 years and it suddenly disappears overnight, it can trigger a mini-psychological crisis,” says Williams.
Even if you have more than enough savings, it can be difficult to achieve the consistency and security of a regular paycheck. Social Security benefits and pensions, when appropriate, can make up some of that missing element.
But Williams has another solution to help soon-to-be retirees avoid salary paralysis.
“Something as simple as a cash management account that automatically deposits the amount needed into their bank account each month will work wonders to eliminate fear and anxiety during this transition period,” says Williams.
Conclusion
Saving for retirement can be complicated, but knowing the common pitfalls can help you avoid nasty surprises later. By starting early, diversifying your investments, and creating a comprehensive plan, you can increase your chances of having a comfortable retirement. You can proactively start learning about retirement planning today, and consider speaking with a financial advisor to help you design a personalized plan tailored to your specific needs.
