It's not only important to be saving and investing for retirement, but it's critical to avoid as many mistakes as possible along the way. A comfortable retirement depends, for most of us, on how diligently we sock away funds for our future. Here are three retirement mistakes you need to stop making today. Avoiding them can improve your future finances by many thousands of dollars.
Brian Stoffel: It's awfully tempting. There's this car you just have to have, or a house that's for sale right next to the school your child would attend, or that European vacation you always promised you'd treat yourself to. The problem: The only place you have that kind of money is in your traditional IRA or 401(k) account.
If you were to touch that money, two big things would happen. First, you might have to pay a 10% penalty if you're withdrawing it before you turn 59-1/2. Second, the money you take out would be lost for good -- and it would miss out on the incredible magic of compounding.
While an early withdrawal of $1,000 out of your IRA when you're 30 might not seem like a big deal, consider this: If that cash achieved a real return of 6% per year (below historical norms) until you reached full retirement age, it would be worth more than $8,600! And that's in today's dollars. Withdraw $10,000, and you'd be giving up more than $86,000.
This is a common problem among American retirees. Boston College's Center for Retirement Research crunched the numbers and found that the average American family is losing $94,000 in retirement savings due to the raiding of retirement accounts for non-retirement purposes.
Of course, there will be times when such withdrawals are justified. But those times need to be carefully weighed against the opportunity costs of doing so.
Matt Frankel: One retirement-related mistake too many people make is over-trading, often on emotion.
There are some good reasons to sell stocks. For example, if something has fundamentally changed with the company, or your original reasons for buying no longer apply, it's perfectly fine to sell your shares and move on. Rebalancing your portfolio is also a good reason to sell stocks from time to time.
On the other hand, it's extremely important to avoid emotion-fueled trading. It's common sense that the goal of investing is to buy low and sell high. However, people tend to do the exact opposite. When the market plunges, they panic and sell, hoping to avoid further losses. And when stocks keep going higher, they see how much money everyone else is making and buy, often with little regard for the inflated prices they're paying.
According to analysis by Dalbar, this is the primary reason the average investor has managed an annualized return of just 2.11% over the past 20 years, while the overall stock market has averaged 8.19%. This means the average investor has underperformed bonds, gold, and real estate -- and hasn't even kept up with inflation.
Don't be like the average investor. Buy your stocks and hold on to them, unless there is a legitimate reason to sell.
Selena Maranjian: One big retirement mistake some people make is assuming the Social Security benefits they'll be receiving in retirement will be enough (or close to enough) to support them. In many instances, that's just not the case. Consider: The average Social Security retirement benefit was recently $1,347 per month, or about $16,000 per year. Clearly, that's not a hefty income. Fortunately, if you earned more than average during your working years, you'll collect more than that. Still, the maximum benefit for those retiring at their full retirement age was recently $2,639 per month -- or about $32,000 for the whole year. That's a lot more, but for people who were high earners during their working life, it may still fall quite short.
What can you do with that information? Well, have a good sense of what to expect from Social Security, and incorporate it into your plans. You can get an estimate of your expected benefits from the Social Security website at www.ssa.gov. If you learn you can expect a monthly benefit of around $2,200, and you know that you'll want $5,000 per month in retirement, you can start figuring out how to build the remaining income stream of about $2,800.
If you have a large enough nest egg as you approach or enter retirement, you might spend part of it on an immediate annuity. At recent interest rates, a 65-year-old man could buy about $540 per month for $100,000. You might use dividend-paying stocks, too, as good ones will appreciate over time while paying you. $300,000 in such stocks with an average yield of 3% will generate $9,000 per year. The key is to know what to expect from Social Security, and plan around it.