You may be aware of the importance of saving for retirement. But in the course of doing so, it’s possible to fall victim to certain mistakes that have the potential to lead to really unfavorable results. Here are a few seemingly innocent blunders that could actually have major financial consequences.
1. Waiting until your 40s to start saving
You might assume that it’s perfectly okay to start saving for retirement in your 40s. After all, you may not earn a huge wage in your 20s, and during your 30s, you may be focused on goals like saving to buy a home.
Plus, if you start saving in your early 40s, you’ll conceivably have a good 25 years to build a retirement nest egg. That’s a long time, right?
While starting to save for retirement in your 40s is better than starting in your 50s, by waiting that long, you’re setting yourself up to miss out on many years of investment gains. The stock market, over the past 50 years, has delivered an average annual return of 10%. With a stock-heavy strategy, your returns might be similar.
So let’s say you make a single $2,000 contribution to your individual retirement account (IRA) at age 42. By age 67, it’ll be worth about $21,700 based on that 10% return. But if you had made that $2,000 contribution at age 22, by age 67, it would be worth about $145,800 (again, assuming that same return).
As such, you really do not want to wait until your 40s to first start funding a retirement plan. If anything, make small contributions during your 20s and 30s and aim to ramp up your contributions in your 40s as your earnings increase and other financial goals have been met. But that way, your money can at least start growing earlier.
2. Steering clear of stocks
With a stock-focused strategy, you might manage to generate nice returns in your retirement portfolio. But if you’re more risk-averse, you may be inclined to steer clear of stocks to avoid taking losses from year to year. That decision, however, could really hurt you financially.
Let’s say you contribute $200 a month to a retirement plan over a 40-year period, only because you invest conservatively, you only end up with just a 5% return in your portfolio during that time. That will leave you with a total balance of about $290,000. But with a 10% return, you’re looking at a balance of $1.06 million. That’s an enormous difference.
3. Taking a withdrawal ahead of retirement
There may come a time when you decide to tap your IRA or 401(k) plan ahead of retirement to cover a financial need or goal. Normally, doing so prior to age 59 1/2 means getting hit with a 10% early withdrawal penalty. But there can be exceptions to that rule, such as taking up to a $10,000 IRA withdrawal to purchase a first-time home. This isn’t an option with a 401(k).
In fact, you may be inclined to do the latter if you need funds for a down payment and won’t have to worry about a penalty. But taking a single withdrawal ahead of retirement could have serious consequences.
When you remove funds from your retirement savings, that money is no longer invested. So let’s say you take out that $10,000 at age 35, but you don’t retire until 65. And let’s assume you went all-in on stocks in your IRA and your portfolio is giving you an average annual 10% return. If so, your $10,000 withdrawal will cost you over $174,000 in retirement income.
You might think that waiting to start funding your nest egg, avoiding stock investments, and taking a one-time withdrawal ahead of retirement aren’t such problematic moves. In reality, they could be. So start saving from as young an age as possible, put your money into the stock market, and find other sources when you need cash that aren’t your IRA or 401(k).
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