Avoid These Investing Mistakes to Reach Your Retirement Goals (Part 2)

Have you started thinking about retirement and begun to worry about what life in retirement will be like if you don’t build a whopping big nest egg? Experts estimate a comfortable retirement requires $1.04 million dollars saved up. Factor in even a few years of high inflation and a couple of decades of average inflation, and that million could easily quadruple! That’s a tall order, but if you’re smart about it and avoid major investing mistakes, it’s very doable. In this article, we’ll detail several of the worst investing mistakes that could derail your retirement dreams and how to overcome them to achieve your savings goals.

Leaving Money on the Table

Most American workers have access to an employer 401(k) or 403(b) plan, and most employers offer a match for employee contributions. Some are very generous. Others offer a $0.50 on the dollar match up to a 6% employee contribution. There, if you earn $50,000 a year, and contribute $3000, your employer throws in an extra $1500. This gives you $1500/year of free money, immediately giving you a 50% return on your investment. Despite this, studies show that on average, employees leave $1300/year of this free money on the table by not contributing enough to maximize their employer’s match.

Stealing from Yourself

Many 401(k) plans allow you to borrow from yourself at lower interest than you’d pay the bank. Indeed, the interest you pay goes back into your 401(k), since that’s where the money comes from. However, if the interest is lower than the returns on your 401(k) investments, you just stole money from yourself through opportunity cost. Worse, if you lose your job before you paid back the loan, or you’re simply unable to pay it back, your retirement funds just took a big hit, and to add insult to injury, the IRS will charge you a 10% penalty and taxes on what has become in effect an early withdrawal. Similarly, many workers raid their old 401(k) funds when they leave a job, rather than rolling them over. Again, this robs their future selves, and they have to pay penalties and taxes on top of it.

Inflating Your Lifestyle

Most workers’ income grows over their careers. This is because they become more skilled and experienced and/or because they’re able to move to better-paying jobs. If you start off making $40,000 a year and manage to score a $10,000 increase through a promotion or moving to a different employer, you have a choice. You could use the extra income to increase your standard of living, what’s known as “lifestyle inflation,” or you could divert part or all of the extra income to increase your savings and investing rate. For many years now, I’ve tried to divert 2/3 of each income increase to my investments, to great effect. By letting myself spend at least some of the increase, I balance this with enjoying some of the fruits of my labor in the present, making this sustainable.

Letting Emotions Rule You

A humorous, but highly instructive story was reported in 2014 by Business Insider. In a Bloomberg Radio show, a guest related the following: “Fidelity had done a study as to which accounts had done the best at Fidelity. And what they found was…“ “They were dead,” interjected the interviewer. “…No, that’s close though!” responds the guest. “They were the accounts of people who forgot they had an account at Fidelity.“ Numerous studies show time and time again that mutual fund investors underperform the very funds in which they invest. How is this possible? Simple. Investors act on fear, panic selling when they should hold on. They then act on greed, buying a “hot fund” after it’s run up a lot and is poised for losses. That’s how emotion-driven trading can hurt your long-term results.

Grabbing the Money Too Early

As another example of leaving money on the table, many Americans claim Social Security benefits as early as they can, at age 62. According to the Social Security Administration (SSA), this can cost them nearly a third of their monthly benefits for life. On the flip side, says the SSA, delaying benefits to age 70 increases monthly benefits by at least 24% for life.

Many people are forced to claim early due to forced early retirement, and many others benefit from early claiming as their ill health makes it likely they won’t survive long enough to make late claiming viable. However, many others who claim early are simply eager to start getting money earlier, at a great eventual cost to their financial health.

The Bottom Line

Personal finance, as I often point out, is exactly that – personal. What’s right for me could be completely wrong for you. However, as the well-known quip goes, “The race isn’t always to the swift, nor the battle to the bold. But that’s the way to bet.” You may choose to go against any or all of the above recommendations, and may even be better off for it. However, in my experience, the odds will be against you.