Saving for retirement can be a challenge, but it's crucial for every senior to have a nest egg they can rely on. If you want to help make sure you have the money you need for your later years, there are a few mistakes to avoid when it comes to your retirement savings efforts.
Here are three of them.
1. Taking early withdrawals
Tax-advantaged retirement accounts such as 401(k) accounts and individual retirement accounts (IRAs) provide the opportunity to claim generous tax savings so investing for your future is easier. However, if you take money out of these accounts before 59 1/2, you can get hit with early withdrawal penalties in addition to being taxed on the withdrawn funds at your ordinary income tax rate. This penalty can make it harder for you to get ahead later on.
The financial penalty you pay if you take an early withdrawal isn't the worst consequence of removing money from your retirement accounts, though. Any cash you take out of your investment account early is no longer going to be there when you become a senior. You won't just lose the withdrawn funds, either. You'll lose any gains that would have resulted from that invested money in the years between the time you made the withdrawal and the time you retire.
Say, for example, that you make a $5,000 early withdrawal at the age of 45 and you retire at 65. If your account earned an average 8% return over the intervening 20 years, that $5,000 withdraw would leave you with around $25,000 less invested in your account by the time you reached retirement. And, because of the early filing penalty, you wouldn't have even gotten to keep the full $5,000 at the time, since you'd have had to subtract taxes and penalties.
The more money you withdraw and the earlier that you do it, the more you'll shrink your account and the more damage you'll do to your future financial security.
2. Dangerous, speculative investing
A retirement account isn't a place to gamble with your money. Engaging in day trading with the hopes of making a quick profit or buying high-risk investments with the goal of big gains are generally not the best approaches to investing your retirement funds. You stand too great a risk of losing more than you can afford and ending up with insufficient money to support yourself.
Instead of taking a chance on your future, it's a good idea to build a diversified portfolio of well-researched investments that you're content to hold for decades. This will help maximize the chances you'll end up with the money you need after leaving the workforce.
3. Paying high fees
Investment fees always reduce the real returns you earn; and this can have an outsized impact when you're investing for retirement since you'll have your money in the market for so long. Avoid investments that cost a lot and instead stick to low-fee options such as exchange-traded funds (ETFs) or stocks purchased through commission-free brokerage firms.
By avoiding fees, investing wisely, and leaving your nest egg alone to grow, you should be able to maximize the chances of building the nest egg you deserve.