Ensuring a comfortable retirement is as much about avoiding costly mistakes as it is about planning and saving money. Unfortunately, not all retirement mistakes are easy to spot as you're making them.
This is where an outsider's perspective can be helpful. A recent Nationwide survey polled workers and retirees about the impact major life events had on their retirements. The following five things were the ones most labeled as hurting their financial readiness.
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1. Making poor investments
Eighty-five percent of those surveyed labeled poor investment choices as a move that hurt their financial security. It's easy to see why. Investments that lose you money move you further from your long-term goals.
Losing money is always a risk with investing, but there are things you can do to reduce that risk. Rather than trying to time the market or guess which stocks are going to explode overnight, diversify your investments.
Index funds are a great way to do this, and they're pretty affordable too. These help you spread your money between many stocks with a single purchase. This reduces the likelihood you'll suffer too much from any single stock taking a dip.
2. Tapping retirement savings early
Typically, you cannot withdraw retirement savings from your accounts before the age of 59 1/2. You'll pay a 10% penalty if you do, and you'll owe income taxes as well if the money comes from a tax-deferred account, like a traditional IRA or 401(k).
There are exceptions to this penalty for things like large medical or educational expenses. But tapping your savings early generally isn't advisable, even if you qualify for one of these exceptions. It'll hurt the long-term growth of your savings, forcing you to set aside more money per month going forward to retire on time.
Build an emergency fund to cover unexpected costs, if possible. And save for planned expenses in a savings account so you don't have to touch your retirement savings until you retire.
3. Waiting until their 30s to start saving
Pushing retirement savings off until your 30s may not seem like a big deal because it still leaves you with decades to save. But it actually makes your job a lot harder than it would have been had you begun saving in your 20s or even earlier.
Let's say your goal is to save $2 million for retirement, and you expect to retire at 65. If you began saving at 25, you'd only have to save $621 per month, assuming you earn an 8% average annual rate of return throughout your career. But if you waited until 35 to begin saving, you'd now have to set aside $1,420 per month to reach your goal, assuming your investments grow at the same rate. That amounts to an extra $213,120 in personal contributions over your working years.
Though it's not always easy, it's best to start saving for retirement as early as you can. Even a few dollars per month adds up over time. Try to increase your contributions each year and whenever your income increases.
4. Taking a 401(k) loan
Some 401(k) plans allow you to borrow against your savings. This enables you to access some of your retirement savings without the penalty that comes with early withdrawals. You'll owe interest, but that money goes back into your 401(k), assuming you keep up with the payments. Fail to do so, and you'll owe taxes and possibly early withdrawal penalties on the outstanding balance.
A 401(k) loan will probably hurt less than taking early withdrawals, but you'll still be slowing the growth of your savings. You may want to explore other types of loans before tapping your retirement funds. And if you do take a 401(k) loan, review your retirement savings plan so you know how much to save going forward to retire when you originally planned.
5. Making extravagant purchases
Everyone has to make big-ticket purchases from time to time -- and sometimes we just want to. There's nothing wrong with that, as long as you can afford them. But unless it's something essential for your well-being, like a furnace to keep your house warm, you may want to prioritize it behind your retirement savings.
Decide how much you want to contribute to your retirement savings each month, and set aside this money right after paying your essential bills. Then you can divide up any remaining cash between wants and other long-term savings goals.
If you've made any of these mistakes in the past, don't panic. Just focus on doing your best from where you are right now. Work out how much you need to save for retirement, and aim to make regular contributions whenever possible. Check in with yourself annually too, and make adjustments to your retirement strategy as necessary.
