November 19, 2008
It's easier than ever to save for retirement -- and that's a good thing, given the somewhat iffy prospects for Social Security over the long term. Unfortunately, it's still all too easy to blow your chance at a comfortable retirement. But if any of these mistakes sound uncomfortably familiar, take heart -- even if your retirement years are looming, you may still have time to spare yourself a seniorhood spent on the wrong side of a drive-through window.
- Not taking advantage of the easy opportunities. Does your employer have a 401(k) or 403(b) plan? Are you contributing -- at least enough to collect the employer match (also known as "free money")? At most companies, participating in the workplace savings plan is a super-easy thing to do, and since the money comes out of your paycheck on a pre-tax basis, it doesn't hurt as much as you might think. If you're not a participant, go sign up. If you can contribute more, do it.
- Deciding you'll deal with it later. Does the idea of saving for retirement make you nervous? Do you just feel like it's not a priority for you right now? Face up to the problem and make it a priority, Fool. If your vision of retirement includes a beach house and exotic travel -- rather than canned tuna and the morning shift at the mall -- you need to get moving. The stock market's growth and compounding power has made millions of people wealthy, but you've got to be in the market in order to benefit.
- Saving for college instead. What's this? Saving for your kids' college education is a good thing, isn't it? It definitely is, but listen up: If you're contributing to a college savings plan instead of your retirement plan, you're making a mistake. Remember that you can get loans for college, but not for retirement. By all means, save for college if you can, but fund your 401(k) and IRAs first.
- Investing too conservatively. Did you swear off stocks entirely after the dot-com bubble burst and decide to stick with bonds instead? Or maybe you didn't swear off stocks, but you've kept all of your retirement assets in relatively "conservative" funds like Vanguard Balanced Index (VBINX) or Fidelity Puritan (FPURX) because you're worried about market volatility?
If so, you're feeling pretty smart right now -- as you've avoided substantial losses. But in the long run, if you're more than five years out from retirement, you'll lose out with this strategy, Fool. While bonds and balanced funds can be useful components of a diversified portfolio, they have usually lagged the stock market over long periods of time, and that means less money for you later. If you're worried about losing your shirt, holding a basket of long-established blue-chip stocks like Pfizer (NYSE: PFE ) , Coca-Cola (NYSE: KO ) , and Altria (NYSE: MO ) can give you a shot at great long-term gains (and great dividends) -- if you're prepared for short-term stock market risk.
- Investing too aggressively. While it might be tempting to plow your entire nest egg into a single stock, think first. Building up wealth in the stock market takes time, but you can lose it very quickly. Former highflyers like Garmin (Nasdaq: GRMN ) and NVIDIA (Nasdaq: NVDA ) have taken steep losses in the past year.
And it doesn't matter if you don't think that one stock is very risky. If you've put yourself in a position where one company's failure can undo years of careful investing, you've made a big mistake. Just consider employees of firms like Ford (NYSE: F ) or General Motors (NYSE: GM ) , some of whom had substantial parts of their retirement portfolios in company stock. Try putting 5% or less of your portfolio into that stock instead -- after you do some careful research.
- Leaving money behind. Do you have old 401(k) balances from old jobs just sitting out there somewhere? You should be actively managing those as part of your overall retirement portfolio -- roll 'em up into a Rollover IRA.