Good news: Today you can take action, no matter how minor.
It’s never too late or too early to think about saving for retirement.
You can get started right now by simply avoiding these five huge mistakes…
For those who might’ve missed the U.S. Government Accountability Office’s May 2015 report on Retirement Security, its findings can be summed up in the lead headline:
“Most Households Approaching Retirement Have Low Savings”
Digging a bit deeper, the GAO found that about half of those surveyed over the age of 55 or older had no retirement savings.
Of those with savings, the median amount for those between 55-64 was $104,000, and $148,000 for savers aged 65-74.
Make no mistake: It will become a big problem for lots of people, and those in government, as that population ages.
What’s just as disconcerting as the GAO report is the chart below from Northwestern Mutual that gives a very clear picture of another trend worth watching: GenXers are genuinely concerned about their retirement security.
In fact, among the general population Northwestern surveyed, GenXers were the least secure.
Clearly, this will be a huge problem for the future.
However, all is not lost for either generation, and those in between…
With careful planning on both sides of the ledger (both those closer to retirement and all those GenXers), retirement woes can be eased.
It’s NEVER too late to start retirement saving—either while in it or headed toward it.
Above all else, avoid these five mistakes…
Albert Einstein reportedly said, “The power of compound interest is the most powerful force in the universe.”
If Einstein said it, investors should be sold on it.
Start a savings account as soon as possible, regardless of your age.
Let’s review why starting as soon as possible WILL make your savings grow…
Investors who want to see what that kind of math can provide over the course of 10-50 years or longer can do so using this handy calculator from the U.S. Securities and Exchange Commission site. It’s truly amazing how much money can be saved over time.
Of course, investors need to be proactive in their contributions to any type of savings account. Sitting on your first $100 investment will eventually pay off, but contributing to it monthly starts the process of adding real value to that account.
Make it a habit to set aside whatever is comfortable on a monthly basis and add it to your account. While today’s interest rates are admittedly a bit deflating, waiting until they get better is a huge mistake.
Start now and don’t look back.
Up next on our list: a retirement helper that’s readily available to you…
With companies moving away from defined pension plans, it’s becoming increasingly incumbent on employees to contribute to both tax-deferred (IRA, Roth IRA) and taxable (401K) savings plans made available by their employers.
At the same time, anyone can open up either type of savings account, and are strongly encouraged to do so.
The rules for investing in these various instruments are spelled out right here. They are important to understand, particularly when it comes to withdrawal rights and timing.
As for your employer-sponsored programs, it’s important to understand your investment choices and how much you may contribute. The maximum contribution allowed by law is $17,500, with exceptions available to those qualified.
In all the cases above, funding the full amount allowable is optimal. Again, those savings are given a chance to grow with time.
It’s a mistake to not enroll.
But what about the match game? It’s up next…
When it comes to employer 401K plans, many companies will match some portion, and in some cases all, of your contributions.
Think about that: you are getting money essentially for free!
Find out exactly how much or what percentage you need in order to have your company contribute to savings.
In many cases, employees have to wait through a “grace” period before becoming eligible for the match, but once that period ends, be sure to sign up for that extra bump.
Not enrolling in any 401K match available through an employer is a very big savings mistake.
Next, you’ve gotta learn to spread it out…
The range of investment alternatives available to savers in any of the aforementioned programs is, while not unlimited, certainly broad and diverse.
Keep a close eye on those investments for a mistake too many people make: no diversification.
Time was that most people invested all their money in their company’s stock… and in some cases ONLY in that stock.
Make sure that if you’re holding ETFs and stocks in those accounts, you aren’t invested in the same crossover stocks.
What about bonds? What are the durations of any individual bonds? Do they match your investment time horizon and risk profile?
The key is to spread the wealth and with it the risks, in your portfolio.
Investor Barry Ritzholtz believes that a truly diversified portfolio consists of large-cap, small-cap and emerging markets stocks, as well as fixed income (bond) assets, real estate and commodities.
Of course, it’s not that easy for most of us to diversify to that extent.
But it’s certainly worth the effort of not making the mistake of keeping all your eggs in one basket and risking a retirement plan on one stock or asset.
Up next: the most important lesson…
After a seven-year run in the market, the bull’s legs may be getting tired.
August was a brutal month for anyone opening up a 401K or retirement account statement, and while we’ve managed to claw back some of the losses, the (near) future is a bit uncertain.
Don’t make the mistake of allowing your emotions run wild and cause you to sell en masse.
It’s a fool’s errand to abandon any well thought out and planned portfolio just because the market took a bit of a shallow—or even deep—dive.
Keep in mind that not every correction results in a selloff the likes of which we saw in 2008-2009, when markets and investors saw a 50% decline in stocks.
Indeed, during the last five years when the S&P 500 rose over 200%, it also saw its share of “corrections” of 10% or more.
Remember, you’ve put in the time and effort to find the right balance of assets to cover the time horizon until retirement. Allow that work and time to pay off for you down the road.
Now, there’s nothing wrong with tinkering. Investment professionals and amateurs alike do it all the time. Changing your portfolio mix is prudent.
But remember to do so in a calm, rational manner…
Take the time to re-evaluate why you purchased certain stocks (dividend growth, corporate financial strength, future growth potential), or why you moved into bonds (interest rate risk changes, steady income).
But whatever you do, don’t make the big retirement savings mistake of taking everything off the table. You will almost certainly miss the next opportunity.
As of this writing Marc Bastow is long MSFT, JNJ and XOM.
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This post originally appeared in mainstreetinvestor.com.
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