Mistakes When Saving For Retirement
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Don't make the below mistakes:
Not investing in your company’s 401(k) at least up to the amount of the match
If your company offers a 401(k) plan, you have no excuse, you should be investing in the plan and saving for retirement. 401(k)’s are some of the best vehicles available allowing the majority of individual employees the ability to save for their retirement. If money is tight, start by saving whatever percentage of your salary is matched by your employer. If there is no match, start with 3%... likely it will make such a small difference to your take-home pay you won’t even notice it.
Not increasing your annual 401(k) contribution by at least 1% every year
It is not enough to invest the same percentage of your income each year. Instead, you should increase the rate at which you contribute by at least 1% each year. Most 401(k) programs allow you to set this increase within their website and the increase will happen automatically. This increase will help build up your savings over time. Likely, you won’t even notice the 1% increase in your take-home pay but you future self will thank you.
Investing in your company’s 401(k) and increasing the contribution by 1%, but not choosing which funds to invest your money in
Some companies have a default investment option for their employees, typically a target date fund. However, some employers, for example the US Federal Government’s Thrift Savings Plan uses a money market fund as their default investment. This means that even if you were an employee from 2010-2015 and you differed up to the government provided match (item 1) and increased your investment by 1%/year (item 2) you were still earning 0.00% on your money during a raging bull market. To prevent this from happening, make sure to log into your 401(k) plan and select your own investments. If you don’t know anything about investing, choose the target date fund that matches the year you turn 65. i.e. If you are 30 now, choose the 2055 target date fund. These funds are set in increments of 5 years. If you don’t have a target date fund as an option pick a US equity fund (50%), an international equity fund (25%), a bond fund (25%). You can also always ask an advisor for help, as most will help you for free.
Limiting your retirement savings to pre-tax dollars only
If you are eligible (earn less than $120k single or $189k married) you should max out your Roth contributions each year. Roth contributions are post-tax but they grow tax free and can be taken out during retirement without paying taxes (as you have already paid them). Stopping here isn’t enough. You should also contribute to a taxable investment account and/or savings account. What today is your “rainy day fund” can also be your “vacation fund” and any leftovers will become your “supplemental retirement fund.” Many people rely extensively on pre-tax retirement savings (401k, IRA, etc) but forget they need to pay taxes when they take that money. By supplementing their pre-tax assets with post-tax assets they can spend down their money while also minimizing the tax burden of their pre-tax withdrawals.
