Retirement planning is something that’s easy in theory but difficult for many Americans to accomplish. Without dedication — and automation — it can be hard to live below your budget and set aside the requisite amount every month to ensure a healthy retirement nest egg.
But even if you’re a committed saver and investor, there are mistakes you can make that could negate your years of hard work and planning. Here’s a list of some common retirement planning mistakes that could derail your long-term savings plan.
Starting Too Late
There is no greater advantage when it comes to building a sizable nest egg than the compounding power of money. The longer your money is invested, the more that compounding can work its magic. But if you start too late, you greatly diminish the effect that compounding can have.
Here’s a simple example to highlight this difference in black and white. Imagine you start setting aside $500 per month at an 8% interest rate. With these parameters, after 40 years of saving, you could have a nest egg of about $1.745 million. However, if you save for only 20 years, your savings won’t just be cut in half — it will drop to about $294,510, for a whopping reduction of about 83%.
Even if you save for 30 years instead of 40, your account balance will only reach about $745,000, less than half of what you could reap with just an additional 10 years of savings. So, the earlier you start, the way better.
Not Taking Advantage of Free Money
One of the best tools you can use to reach your retirement savings goal is the employer match on your 401(k) contributions. Most large companies will contribute 50% to 100% of a certain amount that you put into your 401(k) account, and over time, this can amount to quite a lot of money.
Considering it is essentially “free money,” it pays to maximize your 401(k) contributions at least to the point that you earn your entire employer match.
Withdrawing Retirement Funds Prematurely
If you’re in a financial bind, it can be tempting to draw money out of your retirement funds prematurely. This can be devastating to your long-term savings, though.
Not only will you pay taxes and a 10% early withdrawal penalty on funds you take out of your IRA or 401(k) before age 59 ½, you’re also statistically less likely to return that money at a later date. This combination of factors can be financially crippling.
Putting All Your Eggs in One Basket
Failing to diversify your retirement investments greatly increases the risk to your portfolio. Imagine a scenario in which you work hard and save diligently for 40 years but put all your money into a stock that goes bankrupt. Not only will you have worked your whole life for nothing, but you’ll likely be unable to retire without continuing to work.