5 Common Mistakes to Avoid When Saving For Retirement

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Don't make these common mistakes when saving for retirement. We spell out how you can avoid them to make the most of your money.Saving for retirement is a long-term game. It may sound like a far off goal right now, but most people want to be financially independent one day, even if they enjoy their job.

It takes motivation, persistence and a clear strategy to retire in the future. But you must also stay on the right track. Many people make costly mistakes when it comes to preparing for retirement.

Lack of preparation at all is one of the biggest mistakes because relying on government aid like social security income won’t really be enough. If you are already motivated to actively set some money aside for retirement, here are a few common mistakes you need to avoid throughout the process.

1. Not Maxing Out Your Retirement Accounts

When making retirement contributions, there is usually a limit on the annual amount you can contribute. When you contribute up to that amount, it is referred as ‘maxing out your account’ for the year.

This is good as you want to contribute as much as legally possible each year to boost your retirement savings. Most people will need $1 million or more in assets in order to comfortably retire.

By maxing out your 401(k), IRAs, and any other investment account, you can help ensure that you reach your goal savings amount sooner.

I understand that it’s not possible for everyone to max out their retirement accounts each year especially if your income is lower, but it is a goal you can work toward. Start small, then make an increase each year until you are contributing the maximum amount for the year.

Cut your expenses and actively work to increase your income by getting raises, starting a side hustle, etc. If you never try to reach the maximum contribution limit, you’ll never get there.

2. Not Utilizing Your Employer Match

This can be a costly mistake when it comes to saving for retirement. If your employer offers a 401(k) program, ask if they plan to match contributions as well.

At my husband’s last job, he found out that they offered a 401(k) plan from an employee. By that time, he only stayed at the job for a few more months so unfortunately, the opportunity to save more for retirement was lost.

At his current job, he made sure to go over the retirement planning options and found out that his company offered a generous match. This means that whenever he contributes a certain percentage of his income, let’s say 4%, the company contributes half of that so they put in $0.50 for every dollar.

Some companies will match your contributions dollar per dollar as long as you meet their minimum contribution requirement so this is practically free money you don’t want to miss out.

3. Paying Too Many Portfolio Management Fees

Investing in the market can provide you with a very generous return, and for that, it’s not free. You will pay some fees to manage your investment portfolio like mutual fund operating costs, brokerage trading commissions, and management fees from robo-advisors (websites like Betterment and Wealthfront that manage and re-invest your funds for you).

Talk to your advisor about your desire to limit fees and consider low-cost trading options with reputable platforms like Ally Invest, TD Ameritrade and E*Trade. Do your research and due diligence to find out what your most cost-effective options are.

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4. Withdrawing Funds Too Soon

Another mistake people make when saving for retirement is withdrawing their funds too soon. Your retirement fund shouldn’t be treated like an emergency fund. Its sole purpose should be to provide you with financial independence in the future.

This is why as your account balance grows, you can’t resort to withdrawing the money early and using it, even if it’s for an emergency.

Personally, I view my retirement money as off-limits for now. I would only consider early withdrawals as an absolute last resort if I have no other option.

You don’t want to lose all your hard work and compound interest over the years. Not to mention, there’s a pretty hefty penalty fee to face.

If you withdraw from your 401(k) account before the age of 59 ½, you’ll have to pay a 10% fee in addition to the income tax on the distribution. This means that for someone in a 25% income tax bracket, a $5,000 withdrawal will cost you $1,750 in taxes and penalties.

If you withdraw from an IRA before the age of 59 ½ you will also be slapped with a 10% penalty. However, you can withdraw IRA contributions early and without penalty, if the money will be used for special causes like certain higher education expenses or your first home purchase.

Yet and still, it’s probably not really worth putting a dent in your retirement nest egg when you can just save the money for those purchases separately.

5. Getting Started Too Late

It’s never truly too late to invest in retirement. But in all honesty, you’ll see much better results the earlier you start. Thanks to compound interest, time is on your side when you start saving for retirement in your 20s and 30s.

Someone who starts saving at 25 won’t have to contribute as much as someone who starts at 35. The later you start, the longer you will have to play catch up and may even have to extend your working years to bump up your contributions.

Related: Get Cash Back into Your Retirement Fund with Evoshare

This is why it’s best to get started ASAP, today, as in right now. It doesn’t take that much money to start saving for retirement contrary to popular belief. If your employer offers a 401(k), you can start by contributing 2% of your pre-tax income.

The money will be deducted before you even get your check so you won’t miss it. If a 401(k) isn’t an option for you, open an Individual Retirement Account also known as an IRA.

The maximum contribution limit is $5,500 each year. But, I started by just contributing $100/month as it was all I could afford at the time. The next year, I bumped it up to $350 per month.

Reign in your expenses and boost your income so you can start saving for retirement as well.

Have you ever made any of these mistakes when saving for retirement?