Five Retirement-Savings Mistakes to Avoid

Even if you’ve been saving for retirement, you can get sidetracked: Maybe you’re playing it too safe with retirement investments or borrowing from your 401(k). Here’s what you need to know now to help you save what you need.

Even if you’ve been saving conscientiously for retirement, your approach may need a little tweaking. Maybe you’re not saving quite as much as you should. Or, you might be doing something to undermine your retirement plan without knowing it.

Bottom line: It’s more important than ever to stay on track. Below are five common retirement-savings mistakes and how to avoid them.
Your kids may be able to get student loans for college, but you’re not going to get a loan for retirement.
Mistake #1: Cutting back on contributions to a 401(k) plan

There are plenty of reasons you might trim your 401(k) contributions, starting with rising costs for almost everything, such as utility bills and health insurance premiums. Or, maybe you’re thinking about paying your kid’s college tab or just keeping up with other child-rearing expenses — from braces to cell phones.

Whatever the reason, the result tends to be the same: You don’t sock away enough in a 401(k) plan and you may be missing out on the full company match. Often, 401(k) plans are set up so that the employer adds 50 cents or a dollar to each dollar a worker contributes, typically up to 6 percent of the employee’s salary. Earnings in 401(k) plans are tax deferred, which means you don’t pay taxes until you take the money out in retirement. Withdrawals may also be subject to a federal 10% penalty if taken prior to age 59 ½.

In 2014, you can set aside a maximum of $17,500 tax-deferred in your 401(k), 403(b), or 457 plan. And there’s a bonus: You can catch up with another $5,500 contribution if you’re 50 or older for a total of $23,000. You may not be able to put in quite that much, but if you can, you should. If you have your employer deduct 10 percent, or even 15, from your paycheck for your retirement contribution, you may not even miss it. Out of sight, out of mind.

And remember: Your kids may be able to get student loans for college, but you’re not going to get a loan for retirement.
Mistake #2: Using your retirement funds as a bank

Yes, it’s comforting to know you can always borrow or withdraw from your 401(k). But even when times are tight, that can mean trouble. If you take a loan and then get laid off or accept an early retirement package, you'll probably have to repay the loan right away. If you can’t repay the loan, it will be treated as an early withdrawal, on which you’ll owe income tax, plus a 10 percent penalty if you are under age 59 ½.

By borrowing or withdrawing funds from your 401(k), you may also miss out on compounding investment earnings, which has a direct impact on your account balance down the road.
Mistake #3: Playing it too safe

When there’s a downturn in the market and you see your retirement account balances declining, it’s natural to want to yank your money out of stocks.

But by fleeing to safer investments, you run the risk of missing the upturn when markets turn around. Even the experts can’t predict market movements accurately, so stay invested and avoid worrying about when the time is right to get back into the stock market. Dips do come to an end, and if you stay in the market, you'll be there when things start moving back up. Hang in there.

Stocks have returned about 10% over the long haul, according to Wharton economist Jeremy Siegel. In fact, Siegel’s research shows that stocks held over any past 30-year period have made money and beat bonds. Of course, there is no guarantee that this will always be the case in the future, and while stocks offer long-term growth potential, they may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.

Bear in mind that women tend to invest more conservatively than men, according to U.S. Department of Labor research. Women are also less aggressive than men with respect to the investments in their 401(k) plans. To some extent, that can be a good thing. For example, women put less money in risky stock investments and make fewer trades. But over time conservative investing can take its toll if your savings can’t keep up with inflation.

Diversify your portfolio among various investment types (such as stocks, bonds, and cash). The right mix varies by individual, depending on age and risk tolerance.
Mistake #4: Cashing out your 401(k) balance when you’re switching jobs or leaving with an early retirement package

In general, you should ask your former employer to wire the funds from your 401(k) directly to an IRA or to your new employer’s plan, if your employer’s plan accepts rollover funds from other employer plans. If you don’t request it, the company might cut a check to you, minus a 20% withholding for taxes.

If you find yourself with a check, you have 60 days to complete the rollover to an IRA; if you don’t get it done within that time, the amount is considered ordinary income. That means you are required to include it on your tax return, where it will be taxed at your current, ordinary income tax rate. Plus, if you’re under age 59 ½ when the distribution occurs, you’ll have a 10 percent penalty on the withdrawal. To avoid the taxes and a possible penalty, deposit with the rollover an amount equal to the 20% withheld.
Mistake #5: Forgetting to change the beneficiary on your retirement accounts when you have a life-event change such as marriage, divorce, or death of a spouse

While it doesn’t directly damage your retirement savings, forgetting to change beneficiaries does have an impact on how your savings will pass to your heirs. Keep in mind:

  • Retirement accounts aren’t governed by your will, so writing your ex out of your will isn’t enough. You need to change the beneficiary on your retirement accounts, or your former spouse will still get that money when you die.
  • You’re supposed to name both a primary and a contingent beneficiary on retirement accounts, but most people designate only a primary. That becomes dangerous if the primary beneficiary dies and you fail to name a new one. After your death, depending on the plan’s provisions, the proceeds in your retirement accounts may be paid to your estate, where the money could be whittled down by taxes and possible creditor claims.
  • Changing beneficiaries is simple. Most retirement account administrators offer forms online. You can also call and request that one be sent to you.

Key Points:

  • Try to keep contributing enough to your 401(k) to get the full company match.
  • Try not to withdraw money from a 401(k) or IRA before retirement.
  • Diversify your portfolio between stocks, bonds, and cash, and hang in there even when the market dips.
  • Remember to review your beneficiaries after a life-change event.

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