Investing for retirement is one of your most important financial goals, because you need a nest egg to support yourself in your later years. Unfortunately, many people end up making mistakes that cost them.
Here are three common errors you should be avoiding.
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1. Using the wrong retirement account
There are many options for tax-advantaged retirement savings, and you should be taking advantage of at least one of them. Saving for retirement in a traditional brokerage or savings account would mean needlessly giving up subsidies from the government that make building a nest egg easier.
You also want to be smart about which tax-advantaged account you use. Typically, you should first invest enough in your 401(k) to earn any company match if one is available to you. Then, consider a traditional or Roth IRA for additional contributions as they can offer a broader choice of investment options than your 401(k).
Traditional 401(k) and IRA accounts come with an upfront tax break in the year you make contributions. They can be a better choice than Roth accounts if you expect your current tax rate is higher than what you will pay as a senior. Roth accounts, on the other hand, don't allow you to deduct your contribution when you make it, but as a senior, your withdrawals are tax-free. If you think your tax rate will rise, consider a Roth.
2. Exposing yourself to an inappropriate level of risk
Being too conservative in retirement investing can leave you short of the funds you need, because you won't earn sufficient returns. On the other hand, if you take on too much risk, you could lose money and not have time to make it back, which could also leave you with too little retirement savings.
You need to make sure your asset allocation is appropriate to your age and risk tolerance. While you should develop a personalized approach, a simple rule of thumb is to subtract your age from 110 and put that percentage of your portfolio into stocks.
3. Not paying attention to investment fees
When you are investing for retirement, your money will likely be in your account for decades. If you're paying fees that entire time, they can eat into your returns to a surprising extent.
Fees are an inevitable part of investing for most retirement savers, as ETFs and mutual funds (two common retirement investments) both typically charge at least a small fee. But the cost of different investments can vary dramatically. Generally, you're better off choosing passively managed, low-fee funds rather than actively managed investments that come at a higher price (often without producing better returns).
Unfortunately, if you aren't paying attention to the fees you're paying, you may be giving up an unnecessary chunk of your savings. This, along with forgoing tax advantages for retirement investing or failing to take on the right level of risk, could mean that you don't meet your retirement investing goals.
The good news is, with a little bit of research and planning, you should be able to avoid these errors and hopefully set yourself up for a more secure future.
