Avoiding Common Retirement Pitfalls – Part 2
Good retirement planning is crucial, but the road to retirement is all too often marred by hidden pitfalls and bad advice. In this two-part series, we uncover the places where things often go awry, highlighting spots that can trip one up when planning for retirement and offering suggestions to get things running smoothly again. Part 1 focused on misunderstandings regarding retirement planning and what one’s post-retirement income and expenses will look like. Here, we continue with a discussion of common mistakes and misconceptions surrounding savings and investment strategies.
- Meeting the Match Amount Isn’t Enough
When it comes to retirement planning, 401(k) contributions are a great place to get started. However, they are also an area where many people run into trouble. Most employers will match a maximum of 3-6% of pre-tax income, and it is tempting to contribute just enough to get you the maximum match and stop there. What a lot of employees don’t realize is that this strategy may not provide them with enough savings for a comfortable retirement. Experts typically agree that unless you are planning to greatly scale back your living expenses post-retirement, you should be saving at least 10% of each paycheck. This in turn means that unless your employer is on the upper end of the spectrum mentioned above, matching 5-6% of your income, simply contributing up to the maximum match amount is not sufficient. Take a look at how much your employer matches and consider whether you should be getting to the max match amount and calling it good or whether you need to surpass it.
- Diverse Savings are Robust Savings
If you’re concerned about saving for retirement, chances are you’re diversifying your investments. What many people don’t consider is that they should also be diversifying the ways that they save. As mentioned above, 401(k)s are a great place to start, but a truly robust retirement strategy will draw on far more than just that. Branching out into other methods of saving can open up valuable new possibilities. For example, IRAs and similar investment vehicles typically offer a wider range of investment options than an employer-sponsored retirement plan would, as well as having tax incentives that employer-sponsored plans cannot offer. If you are worried about whether you will be able to save enough through your 401(k) alone, the addition of an IRA or other vehicle may be just what you need.
- Safe Investments Aren’t Always Your Friend
Nobody likes to take unnecessary risks, and when investing for your future, it can be tempting to stick to the safest roads possible. Most people accept the fact that a safe investment won’t yield as much as a risk that pays off, but many are willing to accept this in exchange for the peace of mind that a safe investment brings. The problem is that many people become too reliant on safe investments and wind up with far less saved than they would have liked. Even if you start investing early on, sticking purely to safe investments is unlikely to earn you enough for a comfortable retirement. Even the more common strategy of investing in riskier things while young and switching to bonds and other safe investments when you get older can have a negative impact on your savings if your later investments become too conservative.
Not convinced? A recent study by Wells Fargo found that more than 50% of employees are not investing heavily enough due to overly-wary investment strategies. These workers are so deeply determined to not lose money that they fail to notice valuable opportunities when they appear. It is true that there will always be risks involved in a stock-focused investment strategy as opposed to a bond-focused one, but sticking too strongly to the safe route may hurt you more in the end than a couple risks that don’t pay off.
401(k)s are a great place to start, but one should not rely too heavily on them. Make sure that you are contributing the proper amount for the sort of retirement that you want to enjoy, and not just meeting the maximum value your employer will match. Take a look at IRAs and other investment vehicles that could provide investment opportunities above and beyond what you receive from employer-sponsored plans, and when making those investments, remember that the safe route may not always be the best route.