If your goal is to enjoy your retirement to the fullest, the last thing you'll want is to spend your senior years pinching pennies. And if you manage to sock away a nice amount of money in a 401(k) or IRA, you won't have to. Your savings, combined with your Social Security benefits, could make for quite the comfortable retirement.
But if you're going to make an effort to build a nest egg, take care to avoid these big mistakes.
1. Not snagging your full employer 401(k) match
Many companies that sponsor 401(k) plans also match worker contributions to some degree. Figure out what your full match looks like and do your best to snag it. If you don't, you'll end up leaving free money on the table -- money that could otherwise help you build a more impressive nest egg.
2. Not taking advantage of catch-up contributions
Once you turn 50, you'll be eligible to make catch-up contributions in your retirement plan. If you have an IRA, you'll get to put in an extra $1,000 a year. With a 401(k), you'll get a $6,500 catch-up. These figures may also increase over time, so if you want an opportunity to boost your savings, take advantage of catch-ups once you're eligible.
3. Not investing aggressively enough
The money in your retirement plan shouldn't just sit in cash. Rather, you should invest it so it grows into a larger sum over time. But be careful not to invest too conservatively.
If you stick mostly to bonds throughout your savings window, you'll limit your returns. On the other hand, if you go heavy on stocks, you might easily score double the returns -- and snag yourself a much higher ending balance.
Say you're able to sock away $300 a month for retirement over a 40-year period. If you go heavy on bonds, you might see a 4% average annual return, which would leave you with an ending balance of about $342,000. With a stock-heavy approach, your investments might average 8% a year, leaving you with around $932,000 instead.
4. Not thinking about long-term tax consequences
The upside of saving in a dedicated retirement plan is getting to reap some tax benefits in the process. With a traditional 401(k) or IRA, for example, your money will go in on a pre-tax basis so you can (legally) shield some of your earnings from the IRS's reach. But while you may want the immediate tax break associated with a traditional 401(k) or IRA, a Roth account may make more sense if you think tax rates will rise on a permanent basis. That way, you'll get to withdraw from your savings tax-free as a senior.
If your earnings are too high to contribute to a Roth IRA directly, you can put money into a traditional IRA and convert it to a Roth afterward. Meanwhile, not all 401(k) plans offer a Roth savings option, but many do -- and unlike IRAs, there are no income limits to worry about.
Saving money throughout your career is a good way to set yourself up for a worry-free retirement. Just make sure to avoid these blunders along the way. The last thing you want to do is sabotage yourself and fall short financially during retirement as a result.