Saving for retirement is confusing. It’s no surprise we make mistakes along the way. Luckily, there are strategies to get back on track.
Here are the most common retirement mistakes as shared by financial planners — and how to avoid them.
1. Failing to create a plan
A retirement plan is one of the best ways to spot potential hurdles to long-term goals, says Nancy Skeans, CEO of Schneider Downs Wealth Management Advisors in Pittsburgh.
Creating a financial plan for retirement means estimating future expenses and expected income.
Be sure to write it down. “A plan is not in your head — it’s on paper,” Skeans says.
2. Forgetting about taxes
If you’ve been saving for a while, you might get excited when you peek at your balance. Don’t forget that a chunk of that money — assuming it’s in a 401(k), traditional IRA or similar tax-deferred account — will go to taxes.
You can’t avoid taxes, but you can diversify with after-tax accounts. For example, with a Roth IRA, you put money in after you’ve paid taxes. Then, your money, including investment earnings, comes out tax-free in retirement.
Another idea is to save money in a taxable investment account. You may owe taxes annually on capital gains or dividends, but those rates often are lower than regular income tax rates.
Owning a Roth or taxable account in addition to tax-deferred accounts helps you manage your taxes in retirement. If distributions from a 401(k) or traditional IRA will push you into a higher tax bracket, you can use money from a Roth to keep your tax rate lower.
“We always want our clients to have the most flexibility that they can,” Skeans says.
3. Overpaying on fees
There are many retirement-account fees to watch for, including mutual fund front-end loads and expense ratios, trading commissions, and account maintenance fees. All of these eat into investment returns over time.
At a minimum, look for low or free trading commissions and invest in exchange-traded funds or index mutual funds.
“These are very low cost,” says Lindsay Martinez, founder of Xennial Planning in Oceanside, California. “You don’t have to pay a load for a mutual fund if you don’t want to.”
4. Tapping savings before retirement
Emergencies happen, there’s no doubt. But people sometimes pull money out of retirement accounts when it’s not absolutely necessary.
Doing so triggers taxes and a potential 10% penalty. Depending on your tax bracket, “you could wipe out close to half of what you’re withdrawing with taxes and penalties,” Martinez says.
Ideally, bank some savings separately for emergencies, and save up for your financial goals.
5. Taking on too much, or not enough, investment risk
It can be hard to get investment allocations just right. A good rule of thumb: If you have at least five years to let your money sit, harness the stock market’s long-term growth to build your balance. You have time to ride out market volatility — your investments may lose value in a downturn, but they’ll grow as the market recovers.
“You can take on a little bit more risk,” says Shaun Melby, founder of Melby Wealth Management in Nashville, Tennessee.
The opposite is true for people who’ll need their money in less than five years. Investing too aggressively in stocks could be a problem because you may have to sell investments that have lost value. One easy way to get your asset allocation right is to invest with a robo-advisor. Robo-advisors use computer algorithms to build and manage an investment portfolio for you, which can make sure you're taking on the right amount of risk at the right time.
6. Failing to save enough
Sometimes, not saving enough isn’t a mistake so much as a lack of resources. But no matter how the problem arose, there are ways to address it.
If you’re older and retirement is coming up fast, working longer may be your best option.
That doesn’t necessarily mean more years at a job you hate, says Ashley Coake, founder of Cultivate Financial Planning in Radford, Virginia. A lower-paying, part-time job could be enough to tide you over until you fully retire.
Keep in mind, though, that working longer isn’t always possible. Life, in the form of a health scare or job loss, can foil this plan.
Another strategy that works at any age? Trim spending. “Cutting back on expenses is a tough thing to do but that’s a great way to make a huge impact” on retirement savings, Coake says.
7. Working longer than needed
People in their 60s or 70s often come to Coake, saying they’re tired of working and wondering when they can retire.
“Honestly, this happens a lot,” Coake says. “And I have to say, ‘You could have retired three years ago.’”
It’s not that surprising, Coake says. Figuring out how various investment and retirement accounts will create income, and how those accounts interact with Social Security, is complicated.
“It’s just a really hard picture to put together in your head,” Coake says.
That’s where a written retirement plan comes in handy. The outside perspective of a financial advisor can also be handy, especially if your financial life is becoming more complicated over time.