Once you retire, you shouldn't expect to be able to live on Social Security alone. Those benefits will replace about 40% of your pre-retirement wages if you're an average earner, and most seniors need around twice that sum to live comfortably.
But the money in your IRA or 401(k) shouldn't just sit in cash. It's essential that you invest your money to grow it into a larger sum -- and also, to allow it to keep growing even once you're in retirement.
That said, you'll need to be careful with how you invest your money for retirement. And you'll specifically want to steer clear of these big mistakes.
1. Investing too conservatively
Over time, the value of money tends to erode due to inflation. Keeping your savings in cash at, say, a 1% or 2% average yearly return could mean struggling financially as a retiree. And while investing in bonds will likely give you a higher return than that, your nest egg might still fall short if you limit yourself to conservative investments.
A better bet? Go heavy on stocks when retirement is years away. While stocks tend to be volatile, they might offer returns that are two or three times higher -- or more -- than bonds, thereby allowing your savings to grow nicely.
2. Investing too aggressively when you're on the cusp of retirement
It's a good idea to load up on stocks when you still have much of your career ahead of you and you have time to ride out the market's ups and downs. But if you're within a year or two of retiring, stocks should not comprise the overwhelming majority of your portfolio.
If a stock market crash occurs a month or two before your retirement date and you're heavily loaded on stocks, you might have to postpone that milestone or otherwise risk locking in losses in your portfolio. And that's not a situation you want to land in.
3. Dumping your stocks completely as you leave the workforce
While it's smart to shift toward safer investments right before and during retirement, that doesn't mean you shouldn't hang onto some stocks in your portfolio. Quite the contrary -- you'll want your IRA or 401(k) to continue generating growth even once you're at the point where you're taking steady withdrawals. And stocks will do a much better job of fueling that growth than bonds.
Your specific stock/bond split should depend on different factors, including your personal appetite for risk and the other income sources you have available to you during retirement. But generally, a 50/50 or 40/60 split is a solid bet.
Invest savvily for your dream retirement
The investment decisions you make leading up to retirement could dictate how much you enjoy -- or despise -- that period of life. Do your best to avoid the above mistakes so you can make the most of your senior years without financial worries.