If you want to put yourself in a position to enjoy your senior years to the fullest, then you'll need to make an effort to save for them. There's really no getting around that.
But even if you're someone who consistently contributes to an IRA or 401(k) plan, you might still, unfortunately, end up in a situation where you're short on funds for your retirement. If you want to avoid that fate, steer clear of the following mistakes in the course of saving for retirement.
Image source: Getty Images.
1. Not snagging your full 401(k) match
Some people prefer IRAs to 401(k) plans because they tend to offer a much wider range of investment choices. And there's nothing wrong with deciding that you'd rather keep the bulk of your nest egg in an IRA instead of your employer's 401(k).
However, if the 401(k) plan offered by your employer includes a matching incentive, you should aim to at least contribute enough to that plan to snag your match in full. If you don't, you're giving up free money.
Remember, you're not just losing out on principal contributions in this scenario. Let's say you're giving up an employer match worth $1,500 a year over 40 years. If your 401(k) generates an average annual 8% return -- which is a bit below the stock market's average -- then by missing out on that $1,500 every year for four decades, you're actually denying yourself over $388,000.
2. Investing your savings too conservatively
You may be inclined to invest your retirement savings heavily in bonds to avoid the risk that comes with going heavy on stocks. But if you don't load up on stocks, you'll be taking another risk -- not generating the returns you need to grow your balance nicely.
Let's assume that all in, you contribute $300 a month to your retirement plan over a 40-year period. If you load up on stocks, an 8% average annual return over that time could be more than feasible, leaving you with a balance of over $932,000. If you play it safe and go heavier on bonds, you may be looking at a return of just 5%, leaving you with a balance of about $435,000, assuming the same monthly contribution and 40-year savings window.
3. Not keeping some funds in a regular brokerage account
It's a good idea to sock money away for retirement in an IRA or 401(k) to enjoy the tax benefits involved. With a traditional IRA or 401(k), that means tax-free contributions and tax-deferred gains.
But because you get a tax break on your money in an IRA or 401(k), the IRS is pretty strict when it allows you to access your funds. If you take a withdrawal prior to age 59 1/2, you'll generally be hit with a 10% penalty for tapping your nest egg too soon, though there are limited exceptions to this rule.
That's why it pays to house some of your retirement savings in a regular brokerage account. While you'll lose out on tax breaks, you'll gain the freedom to withdraw from your account whenever you want without running the risk of a costly penalty.
It's a really good thing to be committed to saving for retirement. But make sure to avoid these potentially costly blunders if you want to enjoy your senior years without financial worry.
