As you're saving for the future, you're bound to make at least a few mistakes. There's no perfect way to prepare for retirement, and nobody has all the right answers.
However, some mishaps could be quite detrimental to your long-term savings, and if you don't realize they're mistakes, you may not even know you're making them. Even if you're doing everything else right, these three blunders could wreck your retirement.
1. Cashing out your 401(k) when you leave your job
Approximately 15% of all workers cash out their entire 401(k) balance when they leave their job, according to a study from Alight Solutions. However, those with lower balances are more likely to do so, with a whopping 80% of those with less than $1,000 in their 401(k) choosing to cash out their balance.
This may not seem like a mistake at first glance, because it's still your money -- it's just now in a savings account rather than an investment account. But cashing out even small balances can wreak havoc on your long-term retirement plan without you even realizing it.
When you withdraw your savings from your 401(k) before age 59-1/2, you're typically subject to a 10% penalty as well as income taxes on the amount you withdraw. If you have hundreds of thousands of dollars in your 401(k), cashing out your entire balance when you leave your job could lead to hefty fees and taxes.
But even if you only have a couple thousand dollars in your account, it could still hurt your overall savings. Withdrawing your money means you're missing out on growth potential. So not only do you have to pay fees and taxes on your cash, but if you go from earning a, say, 7% annual return on your investments in your 401(k) to a 1% annual return by stashing that money in a savings account, your money won't grow nearly as much over time. Even if you reinvest your cash in a new 401(k) down the road when you find a new job, you may not be able to make up for the time you weren't investing your money at all.
For that reason, it's best to either roll your savings over to an IRA when you're in between jobs or simply leave your money in your 401(k) from your former employer. Then if you choose to consolidate all your retirement accounts down the road, you can do so, but until then, your savings will continue to grow.
2. Not planning for a potentially long retirement
One in three of today's retirees can expect to live into their 90s or longer, according to the Social Security Administration. And with greater advances in healthcare, it's not unlikely that we'll see more retirees living longer and longer. Depending on what age you retire, that could mean spending 30 or more years in retirement.
A long retirement can be both a blessing and a curse. While it's wonderful to have more time to spend at your leisure, that also means you'll need to save more to ensure your money lasts as long as you need it to. Underestimating your life expectancy by even a few years could result in shortchanging your retirement savings by hundreds of thousands of dollars, too. For instance, if you're spending a conservative $40,000 per year in retirement and you live just 5 years longer than you anticipated, that's an extra $200,000 you'll need that you didn't prepare for.
Of course, it's impossible to accurately predict exactly how long you'll live. But estimating as closely as you can will pay off down the road. Take an honest look at your current health as well as your family history, and be realistic about how many years you expect to spend in retirement. Again, you don't need to predict down to the day how long you'll live, but if you plan for a 15-year retirement and end up with a 25-year retirement, you'll be in a heap of financial trouble.
Estimating your life expectancy is also a good way to gauge when you should claim Social Security benefits. You get a permanent boost in benefits each month if you wait to claim until after you reach your full retirement age (which is either age 66, 66 and a few months, or 67, depending on the year you were born). If you expect to have a long retirement but your savings won't last as long as you hoped, a few hundred dollars more per month from Social Security could help make retirement a little more comfortable.
3. Thinking you can work as long as you want
If you're nearing retirement age and your savings aren't as strong as you'd like them to be, you may choose to continue working to give yourself more time to build a healthy nest egg. However, if you're unable to work as long as you'd planned, you may be forced into an early retirement before your savings are ready.
Approximately 43% of retirees say they had to retire earlier than they expected, a report from the Employee Benefit Research Institute found, and the top two reasons were health issues and job loss as a result of downsizing or reorganization. If you lose your job or develop health problems that prevent you from working longer, you may be forced to retire with less-than-ideal savings -- making for a less comfortable retirement.
While there's no way to predict whether you'll be able to work as long as you want or be forced into an early retirement, it's safer to plan for the latter. If you beef up your savings as much as possible when you're younger rather than depending on the ability to work forever, you'll be better off financially if you do end up retiring earlier than you'd planned.
Even savvy savers make some retirement planning mistakes, and that's OK -- it just means you're human, after all. But if you notice yourself falling victim to these blunders, it's important to correct them as quickly as possible. The faster you can get your retirement savings back on track, the more prepared you'll be down the road.