Starting to save for retirement at an early age is one of the most important financial decisions you can make. In fact, the difference between starting in your 20s and waiting until your 40s can equal hundreds of thousands of dollars available in your retirement savings.
Making a commitment to put away money isn’t a surefire recipe for success. There are plenty of mistakes you can make along the way and it’s imperative that you avoid them in order to protect your future.
While saving for retirement is smart, it’s equally important that you build your financial acumen along the way. And while it’s always smart to meet with a financial adviser and discuss your situation, this article touches on some of the mistakes you definitely want to avoid.
#1: Too Cautious, Too Early
It’s good to strike a healthy balance between zeal and caution, but don’t make the mistake of being too cautious early on. If you start saving at age 25 — as advisers suggest — you have roughly 30 or 35 years before you’ll need your retirement savings.
With that much time, there’s no reason not to take some chances. Hitting on a couple of big investments early in your career can yield significant returns over the longer investment horizon. Taking a super conservative approach may prevent big losses, but could also prevent noteworthy returns.
#2: Little Diversification
Another mistake to avoid is putting all of your eggs into one basket, or one asset class.
Take the stock market as an example. Let’s say you put your entire retirement portfolio into stocks. Over the years, your portfolio grows to a whopping $1 million. But at age 59, one year before you plan to retire, the market plunges and experiences losses of 40% and trimming $400,000 off the value. That’d be hard to overcome in the remaining years until you retire! Diversification is key, so make sure you’re balancing your savings and moving into more conservative investments in the final years of your career.
#3: Failing to Check Fees
If you’re like most people, you don’t spend much time studying the fees associated with your retirement savings — but you should. A single percentage point difference in fees could end up costing you tens of thousands of dollars over the life of your account. Be meticulous with analyzing fees and never sign up for an account without having a comprehensive understanding of the fee structure.
#4: Not Having Goals
While life is unpredictable — income changes and external factors interfere — but it’s a smart idea to have your retirement goals established on the front end. When you have an exact figure to aim for and know when the time is right for new investments, you’ll find that it’s a lot easier to manage your finances: Everything has a place and the timing is already figured out.
#5: Filing to Consider Tax Breaks
A major aspect of retirement savings is figuring out how to best manage taxes. Some accounts allow you to defer tax payments until the withdrawal date, which lets more money grow with interest. Others require post-tax contributions, which means you don’t have to pay taxes when it’s time to withdraw money.
Talk about the pros and cons with a financial adviser to learn more.
Plan Smart, Avoid Retirement Mistakes
By planning smart, you increase the likelihood of having a comfortable retirement with a large enough nest egg to live on for many decades to come. The key is to avoid debilitating mistakes that eat away at your portfolio and limit growth.
If you can do that, you’ll be well on your way to financial success.
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