We all make mistakes, but some mistakes carry greater consequences than others. Unfortunately, making certain mistakes when it comes to planning for your retirement can have dire consequences on your future, particularly as you get closer and closer to your desired retirement age. So in an effort to get your retirement planning (or lack thereof) into tip-top shape, here are four common mistakes people make with retirement planning that you should avoid.
Not Maximizing Your Employer Match
If you are fortunate enough to work for an employer that offers a 401k or other retirement plan with a match program, take advantage of it! Once you have vested in the plan (that is, once you have worked at the company long enough to have an absolute right to any portion of the account value that your employer has contributed on your behalf), that employer match money is yours, but only if you have been contributing to the plan yourself. What it comes down to is that an employer match is free money, and the best return on your dollar that you’ll likely find. For instance, if your employer matches dollar for dollar up to 3% of your salary, then you should be contributing at least 3% of every paycheck into the plan. By doing so, you effectively save 6% of your salary every year, but only miss out on 3%.
Not Diversifying Your Investments
The old saying goes, "don’t put all of your eggs into one basket." It is sound advice, and almost directly applicable to your approach to your investment portfolio, but people often don’t follow it. It is easy to get caught up in your investments when the market is doing well, and chasing those big returns may seem like a good idea. Better returns equals better nest egg. But without proper diversification, you are subjecting yourself to significantly higher risk with only a potential for better returns. A lack of proper diversification is particularly prevalent among those investors who receive employer stock as a portion of their benefits or compensation.
Cashing Out of Your Plan
When you leave an employer with whom you held a retirement account, you have several choices regarding what to do with your account. First, you can leave it in the plan, which is not a bad choice if you do not have another retirement account (such as an IRA) to which you can roll the funds. Second, do a trustee to trustee transfer (also known as an IRA rollover) to another qualified retirement account like an IRA or your new employer's plan. Third, you can cash out. This is where the mistakes begin. Many people decide to cash out their employer retirement plan when they leave the company. Some cash out with the intention to reinvest the money into another account, but there is one enormous difference between cashing out and rolling over. When you cash out of a retirement plan before the age of 59½, you are not only subject to income taxes on the entire value, but also to a hefty early withdrawal penalty. This can be a pricey move. For some people, this means nearly cutting the account value in half! When you initiate a trustee to trustee transfer, on the other hand, you can roll over the entire account value into another qualified account without paying any taxes or fees. So when you leave an employer, you should ideally consider rolling the money over into an IRA. This not only eliminates any current taxes or penalties, but it also opens up your investment opportunities (401k plans generally have limited investment options) and likely significantly decreases the investment fees (401k plans tend to have high fees).
Becoming Paralyzed by Choices
Retirement planning is full of questions. "How much money do I need to save?” "How much money do I need in retirement?” "What investments are right for me?” While retirement planning is full of important choices to make, don’t allow yourself to be overwhelmed into inaction. Avoidance and inaction are perhaps the biggest mistakes you can make when planning for you retirement. So take things one step at a time. Since time (and its friend compounding interest) is your most valuable asset, the most important thing to do is just to start saving and investing into a retirement account, whether it be an employer plan or an IRA. To discuss your retirement plan and the options that are best for you, schedule a free, no obligation appointment with a CFS* Financial Advisor.**Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Lafayette Federal Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.