Saving for retirement is an essential part of everyone’s financial foundation. Unfortunately, many Americans fail to save for retirement when other financial priorities like raising a family, medical bills and starting a business come up along the way.
Having a solid retirement plan can help you stay on track, but it won’t be very useful if you don’t understand why. Read on to learn about the four common mistakes that cripple many people’s retirement dreams and ensure you’re not one of them.
Not Participating in an Investment Account
Retirement savings options come in many different shapes and sizes, but most commonly, you will participate in a 401(k) or IRA account. Because these accounts include compounding interest, every dollar saved now will continue to grow until you are eligible to take distributions. But this concept is easier said than done. Money Under 30 provides a great example of the power of compounding interest. View it here.
As people refocus their priorities, such as remodeling a house, paying medical bills, or other expenses, their savings tends to take a back seat. This means that no interest is compounding, and money is not accruing over time, leaving you with little-to-no funds in retirement.
If your employer offers a 401(k) program, but as much as you can into the account each pay period. It’s typical for companies to match 3-5% of salary contributions but check with your human resources team or benefits administrator to learn the terms of your company-sponsored account.
Additionally, if you have an IRA, such as a Traditional or Roth account, you can contribute up to $6,000 annually if you’re under the age of 50. If you’re over the age of 50, you can contribute up to $7,000 per year by utilizing a catch-up contribution plan.
To avoid a retirement savings setback, try reducing unnecessary expenses and prioritize your savings. Do you really need new flooring in your kitchen, or do you want new flooring in your kitchen? There is a difference. Learn about using the 50/30/20 budget rule to save and spend appropriately on the Slavic401k blog.
Not Utilizing Employer-Match Programs
Another mistake people make is not utilizing employer-match programs. Put simply, employers match a percentage of your salary contributions. For example, if your employer offers matching up to 5%, then as long as you’re contributing 5% of your salary annually, they will too. This can be a great way to grow your retirement savings, taking you from 5% to 10% savings annually. Our 401(k) calculator can help you visualize the difference an employer match can make on your retirement account.
Regardless of how the plan is structured, if there’s free money available, you should be taking advantage of it. Talk to your employer to learn about the options available to you so you can ensure you have more money for your retirement savings. You can also learn more about employer-match programs by reading the Slavic401k blog.
Using Retirement Accounts for Debt Pay-Off
Sometimes, life happens, and when it does, it’s important to be prepared. Having an emergency fund to pay for things like unexpected medical emergencies, auto repairs, or necessities in the case of a job loss is crucial to every financial foundation.
A financial drawback of not being properly prepared for an emergency is driving up debt in the event the unexpected occurs. When people’s debt increases, then they may turn to their existing retirement account to withdraw funds to pay for the emergency. This typically results in early withdrawal fees and other fees that negatively affect a person’s retirement account.
It’s important to be prepared so this doesn’t happen to you. Learn how to save for an emergency fund and when to use it by reading Slavic401k’s Emergency Funds 101 blog post. The information included will help you learn how to appropriately utilize your account without leaning on your retirement savings in a time of crisis.
Borrowing From Your Plan or Cashing Out
Similar to utilizing retirement accounts for debt pay-off, borrowing from your retirement account can be risky, even if you plan on paying it back. Because employer-sponsored accounts often include benefits like partial withdrawals, people utilizing these accounts may be more incentivized to borrow from their retirement to pay for large expenses instead of taking out an appropriate loan with the bank.
This can be damaging to a participant because they will pay income taxes on the funds, as well as a 10% early withdrawal penalty if the funds are withdrawn before the age of 59½. Additionally, the withdrawal can hinder your ability to stay on track financially for your retirement, especially if you can’t pay the funds back to the account quickly.
Similarly, cashing out all of your retirement funds before the age of 59½ can result in your provider withholding up to 20% of your account for penalties and taxes. That is 20% of your overall retirement savings and can be detrimental to some accounts.
The approach of borrowing or cashing out is not recommended by most financial advisors. If you’re looking for extra funds to make updates to your home or find yourself in a financial emergency, seek out loan options provided through financial institutions, a family member, or tap into your emergency fund if you have one.
Remember, establishing a nest egg for retirement is a continual process, and may require reevaluation as your priorities and responsibilities change throughout life. If you find yourself lost or making mistakes, it may be beneficial to speak with a financial advisor who can help you get on track.
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