Retirement savings mistakes have a tremendous impact on your financial future. Retirement might be several decades into the future, but it’s important that you take steps today to prepare for this transition. Even if you don't know a lot about financial planning, there are several resources and experts who can guide you through the process. The fewer mistakes you make, the better off you'll be. For that matter, here are seven common retirement savings mistakes you should avoid at all costs.
1. Contributing the Least Amount to Your 401(k)
If your job offers a 401(k) plan, you need to decide how much to contribute to your account. As tempting as it may be, fight the urge to contribute the least amount, which is typically 2% or 3% of your pay. Although a small contribution adds money to your paycheck, this is one of the biggest retirement savings mistakes because it reduces how much you'll have when you're ready to retire. If possible, contribute at least 5% or 6% of your salary.
2. Ignoring an Employer-sponsored Plan
In addition, don’t decline enrollment in your employer’s retirement savings plan. This is an easy and hassle-free way to prepare for the future since contributions are automatically deducted from your paycheck. And since all contributions are invested, you'll earn a higher return than relying on your savings account.
3. Relying on Social Security or Your Spouse
If your spouse works and earns good money, you may feel that you don't have to focus so much attention on preparing for your retirement, especially if you'll qualify for your own Social Security check in the future. However, your financial situation can change. For example, you and your spouse may divorce before hitting retirement age, and depending on inflation, what you receive from Social Security may not be enough. Therefore, it’s important to have your own retirement savings account.
4. Putting All Your Eggs in One Basket
Starting a 401(k) at work is an excellent start. However, you should consider other savings options as well. For example, talk to your bank or financial advisor about starting an individual retirement account. This adds to your retirement savings, increasing your future income.
5. Taking Cash to Buy a House
Although it's common to take cash from a retirement account to purchase a home, withdrawing money early can trigger hefty fees and reduce earning potential. Take money from your retirement account as a last resort. Look for other ways to save up, such as using a work bonus or a tax refund.
6. Taking Cash to Pay for a Kid’s Education
Do not pay for your child's education at the expense of your retirement savings. The truth is, there are several ways to pay for college, such as state programs, scholarships, grants and federal loans. However, there are only a few ways to save for retirement. With regard to your children's education, do not touch retirement accounts.
7. Taking a Withdrawal Instead of a Loan
If you must take money from your retirement accounts, pay yourself back. If you take a withdrawal and do not repay the money, you’ll get hit with a penalty, plus you’ll have to pay taxes on the withdrawal.
Planning for your retirement is important, and the earlier you start, the better off you'll be. But along with saving early, you should avoid dipping into your accounts before you're ready to retire. It’s your turn: at what age did you start planning for retirement?