Retirement Mistakes

Investing in your future especially in a retirment account takes time and discipline. You most likely won't see the money grow too fast anytime soon. Remember that slow and steady wins the race.

I've been contributing to my 401K since the age of 22. However, I made a costly mistake to cash it all out to use as a downpayment towards our first home. Since then, I've gotten back on track and is now contributing 15% of my paycheck towards my golden years.

Here are some other costly mistakes that people often make to detriment their retirement accounts. Are you one of these people?

1) Blowing retirement savings early
This happens when people switch jobs and are forced to decide on whether to roll their 401K into an IRA or cash it all out. And guess what the majority ends up doing?

2) Turning down free money
That's right, you heard me. The money is FREE and is waiting for you to collect it. But what do you do, you end up turning this free cash away. You do this by not participating in your company's 401K match.

I've seen this all too many times happening to friends and even current coworkers at my workplace. I ask them why not get a few hundreds to thousands of dollars for free each year. They reply with being lazy = lame.

3)Saving without a goal
Unfortunately, many of us get this magical retirement number wrong. We end up miscalculating the wrong retirment age and not meeting its goal by socking away the correct amount every month. Then when it comes time to retire, you just don't have enough to last you through.

4)Ignoring your investments
Your retirement assets require regular upkeep just like your house and your car. Ignore them and they could fall apart. Be sure to review and rebalance your investments at least once a year to make sure you're comfortable with the level of risk in your portfolio.

Getting a late start is just as bad. For proof, look at the following examples.

Let's say a 25 year-old begins saving $3,000 a year, but stops after only 10 years. Over the next 40 years, she could expect that $30,000 investment to grow to more than $472,000, assuming an 8% return.

If the same investor waited until age 35 to begin saving and stashed $3,000 a year for 30 years, she could only expect to have about $367,000, assuming the same 8% annual return.

By waiting 10 years to start saving, you lose out on the benefits of time and compounding returns, not to mention over $100,000!


MoneyReasons said...

#4 sort of is my sin. I don't ignore my 401(k) balance, but I don't rebalance it enough!

Currently my investment mix is way to aggressive 95% is in equities, 5% in bond and equities... That's way way way to much in equities for me.

Once my balance is back in the blank, I'm going to rebalance it using the 110 - age in stocks, and the rest in bonds, with 5% in cash equivalents.

Congrats to you! Even you mistakes is smart (I consider that 401k money well spent vs buying a new car like 1 of my friends did)!

StackingCash said...

What should I invest in to obtain an 8% rate of return? Any particular stock, mutual fund, or exchange traded fund?

Mike said...

Hi Money Honey!

It's been a while. How have you been?

I'm just curious, why do you feel like it was a mistake to put your 401(k) as a down payment?

Is it the opportunity cost of tax-free growth?

Money Honey SF said...

Mike - Hello and welcome back. I've been really busy. Haven't really had a chance to sit down and gather my thoughts to actually blog.

I felt it was a mistake because of the compounding interest. I felt I had lost about $20K accumulated over 3 years. That $20K could have well appreciated and compounded over a few decades.

Whereas during that time, we were honest to put down 20% for the house when everyone else had zero to nothing down.

Money Reason - That was not a smart move for them to use their 401K to pay for a car. This is a very common mistake that people cannot look past as they look at it in the present.

They don't realize that money in a 401K is tax free and it will eventually grow to a staggering amount overtime whereas a car is nothing but a depreciative asset.

The swing between these 2 directions combined is staggering.

Stacking Cash - I also wish I knew if there were any assets out there yeilding a consistent ROR as 8%. If anyone knows, please let me know since I'm a serious Long Term investor.

Joey Gray said...

I've read articles that recommend to invest or live on Third World countries to have a greater value of their retirement funds. And I think that's a good idea.

Alice Byrne said...

Well, I agree that procrastinating plans about your retirement is a bad idea, since it's better for you to start thinking about it before it's too late. Asking for advice and planning ahead is always a good idea.