Retirement may seem a long way off and far removed from your day-to-day concerns. And yet, this is actually the best time to start planning and saving — that is, when you still have time to accumulate the money you’ll need.
Here are some common mistakes that throw people off course in their retirement planning. Knowing these pitfalls should help you steer clear and save more.
Retirement Mistake #1: Failing to take full advantage of retirement saving plans
If your company’s 401(k) or other qualified employer sponsored retirement plan (QRP), including 403(b) and governmental 457(b), offers a company match (meaning that your employer pledges to match your contribution up to a certain percent of your salary), you have an extra incentive. If you neglect to invest enough to receive the full company match, you’re leaving money on the table. If you get a raise, consider increasing your QRP contribution.
Retirement Mistake #2: Getting out of the market after a downturn
When the market takes a big hit, you may be tempted to pull out all the stocks in your retirement portfolio. If you do, you’ll miss the gains if the market turns around. You want to keep a good mix of asset classes in your portfolio: stocks, bonds, and cash. And once a year, you should rebalance to keep your asset allocation on track.
Retirement Mistake #3: Buying too much of your company’s stock
If your employer's stock shares are an investment choice in your 401(k), you may want to consider keeping your allocation to no more than 10 percent. With your salary already tied to your company’s fortunes, you don’t want a sizable part of your retirement savings to be similarly dependent.
Retirement Mistake #4: Borrowing from your QRP
Many QRPs allow you to borrow from your account. Unless you need the money for an emergency, try not to. Borrowing can be an expensive choice, in two ways:
- Smaller retirement savings: When you take out a loan you are losing the potential for investment growth and that could leave you with a smaller retirement savings. How much smaller? This depends on a number of factors, including the size of the loan, the repayment period, whether you continue contributions during this period, the earnings on your account, and the loan interest rate. Also, if you stop contributing while you are paying back your loan, you won’t receive any employer matching contributions.
- Repayment requirements: If you lose your job or take another one, you’ll have to repay the money quickly, generally by your tax filing deadline. However, if not repaid, the outstanding loan balance is generally subject to income tax and possibly an IRS 10% additional tax for early or pre-59 1/2 distributions.
In addition, cashing out of your 401(k) when you move to a new employer might be costly as well. Know your distribution options when changing jobs.
Retirement Mistake #5: Underestimating the cost and length of retirement
Some crucial factors to take into account:
- Longevity: If you retire around age 65, you could spend a quarter century or more in retirement. Many advisors now urge clients to save enough to last 25 to 30 years.
- Inflation and taxes: Even with relatively mild inflation over the past 25 years, the cost of living has more than doubled. Also consider what taxes you’ll be paying on the money you distribute from your retirement account.
- Health care: Even with Medicare, you could have expenses for supplemental insurance, some prescription drugs, and nursing home care.
- Lifestyle sticker shock: People in retirement generally need at least 80 percent of their pre-retirement income.
Saving enough for retirement?
Find out with My Retirement Plan, an online tool that makes it easy to see if you are on track. After you answer a few questions, My Retirement Plan will calculate your retirement savings goal and recommend personalized next steps.
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Products to Consider
- IRA Center
- 401(k) Rollover Center
- Retirement Tools and Calculators
This information is provided for educational and illustrative purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Investing involves risk, including the possible loss of principal. The accuracy and completeness of this information are not guaranteed and are subject to change. Since each investor's situation is unique, you should review your specific investment objectives, risk tolerance, and liquidity needs with your financial professional to help determine an appropriate investment strategy.
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- Not Insured by the FDIC or Any Federal Government Agency
- Not a Deposit or Other Obligation of, or Guaranteed by, the Bank or Any Bank Affiliate
- Subject to Investment Risks, Including Possible Loss of the Principal Amount Invested
Investment products and services are offered through Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC (WFCS) and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.
Retirement Professionals are registered representatives of and offer brokerage products through Wells Fargo Clearing Services, LLC (WFCS). Discussions with Retirement Professionals may lead to a referral to affiliates including Wells Fargo Bank, N.A. WFCS and its associates may receive a financial or other benefit for this referral. Wells Fargo Bank, N.A. is a banking affiliate of Wells Fargo & Company.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.
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I am a financial expert with extensive experience in retirement planning and investment strategies. I have worked with numerous individuals, providing personalized advice and helping them navigate the complexities of financial planning. My expertise is grounded in a deep understanding of retirement savings vehicles, investment products, and market dynamics.
Now, let's delve into the key concepts mentioned in the article:
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Retirement Planning Timing:
- The article emphasizes the importance of starting retirement planning early when there is ample time to accumulate the necessary funds.
- Planning ahead allows individuals to take advantage of compounding and ensure a comfortable retirement.
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Common Retirement Mistakes:
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Mistake #1: Neglecting Employer-Sponsored Plans:
- Emphasizes the significance of maximizing contributions to employer-sponsored retirement plans, such as 401(k), especially when there is a company match.
- Failure to leverage employer contributions means missed opportunities for wealth accumulation.
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Mistake #2: Market Timing:
- Advises against panicking and selling off investments during market downturns.
- Stresses the importance of maintaining a diversified portfolio and rebalancing periodically.
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Mistake #3: Overinvesting in Company Stock:
- Cautions against allocating too much of one's retirement portfolio to their employer's stock.
- Diversification is key to mitigating risk, especially when already tied to the company's performance through employment.
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Mistake #4: Borrowing from Retirement Accounts:
- Highlights the potential drawbacks of borrowing from qualified retirement plans (QRPs), including the impact on investment growth and the risk of smaller savings.
- Warns about repayment obligations, tax implications, and the loss of employer matching contributions.
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Mistake #5: Underestimating Retirement Costs:
- Addresses factors such as longevity, inflation, taxes, healthcare expenses, and lifestyle adjustments.
- Urges individuals to save adequately for a retirement that may last 25 to 30 years.
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Retirement Considerations:
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Longevity and Inflation:
- Acknowledges the increasing life expectancy and the need to plan for a potentially lengthy retirement.
- Highlights the impact of inflation on the rising cost of living.
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Healthcare Costs:
- Emphasizes the importance of considering healthcare expenses, even with Medicare coverage.
- Advises individuals to account for costs related to supplemental insurance, prescription drugs, and potential nursing home care.
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Lifestyle and Income Replacement:
- States that retirees generally need at least 80 percent of their pre-retirement income to maintain their lifestyle.
- Encourages the use of tools like "My Retirement Plan" for personalized retirement savings calculations.
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Disclaimer and Investment Risks:
- The article includes a disclaimer, emphasizing that the information provided is for educational purposes and not a solicitation to buy securities.
- Warns about the risks of investing, including the possible loss of principal, and highlights the uniqueness of each investor's situation.
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Financial Products and Services:
- Mentions Wells Fargo Advisors as a provider of investment and insurance products.
- Clarifies that these products are not insured by the FDIC, not deposits or obligations of the bank, and subject to investment risks.
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Asset Allocation and Diversification:
- Advises on the importance of asset allocation and diversification in managing risk.
- Clarifies that these strategies do not guarantee returns but aim to mitigate risk.
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Tax and Legal Considerations:
- Emphasizes the need for individuals to consult tax and legal advisors for personalized advice.
- Highlights that the article's communication cannot be relied upon to avoid tax penalties.
In conclusion, the article provides a comprehensive overview of key considerations and potential pitfalls in retirement planning, offering valuable advice to individuals at various stages of their financial journey.
