It’s not uncommon for someone to make a mistake or two in retirement planning and investing strategies; we’re all human. Being able to recognize those mistakes, though, will assure you’re better prepared to avoid them in the future.
What can really cost you are the mistakes you don’t even realize you’re making. These don’t present themselves as readily as something like missing a deadline for an IRA contribution. Here are five you should be aware of.
1. Not updating your account beneficiaries
Every investment account allows you to designate a beneficiary to receive the assets upon your death. While no one likes to think about their own demise, it’s important that you prepare for it.
If you don’t have proper beneficiary forms filled out, your retirement accounts will go to probate, which is both lengthy and costly. It means your rightful heirs will have to wait a long time and receive less than they would if you just took a bit of time to fill out a form.
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What might be worse is if your money goes to someone you no longer intend to give it to (like an ex-spouse). If that’s whose name is on the form, that’s who the money goes to.
2. Paying higher fees than necessary
The fees in some workplace retirement plans can be especially high. While some fees are unavoidable, you might be able to mitigate others. One of the biggest culprits in high fees is the expenses related to your investment choices.
While you might have limited investment choices in a 401(k), for example, it pays to review your options from time to time. More often than not, the investment options with the lowest expense ratios can be some of the best you can make, like broad-based index funds.
Many investors choose target-date funds in their 401(k)s. Those frequently use actively managed funds to make up the portfolio, passing on high fees to investors. You’ll be better off finding lower-cost options and spending just a little bit of time researching asset allocation on your own.
3. Ignoring your accounts
While there’s no need to check your retirement accounts every day (in fact, that could be detrimental for some), ignoring them altogether isn’t great, either.
Leaving a 401(k) in place after you leave a job could be a mistake. Unless you have a good reason to keep those assets in the old 401(k), you’ll probably be better off in the long run by rolling over that account into an IRA. Most IRAs don’t charge any fees and offer many more investment options.
Moreover, checking your accounts periodically will allow you to monitor your asset allocation. You might need to adjust your holdings to keep your investments in line with your goals.
You’ll also have the opportunity to review the expense ratios of your investments, and check to see if there are any lower-cost options in the same asset class that you could switch to.
More-sophisticated investors may find opportunities to perform a Roth conversion on some of their retirement assets during a market sell-off if they’re also expecting reduced income for the year. And others, by investing in a taxable account, could find opportunities to use tax-loss harvesting.
4. Not taking advantage of regular brokerage accounts
When people think of retirement savings, they usually think of tax-advantaged retirement accounts. But you could be missing out on an opportunity with regular brokerage accounts.
Using a regular brokerage account offers much more flexibility than a retirement account, which has strict rules on when you can and can’t withdraw funds. Some might even force you to take withdrawals later in retirement.
Furthermore, investing in a taxable account affords the opportunity to use tax-loss harvesting to reduce your tax burden. When you want to use those assets to fund your retirement, you may be able to keep your capital-gains tax rate at 0%. At the very least, you can probably keep your capital gains tax very low in retirement.
5. Not knowing how much you need to retire
Perhaps the biggest mistake you might be unaware that you’re making is not knowing how much you need to retire. If you don’t have a plan for how much you’ll need, you might not be saving enough, or you could be saving too much.
Your retirement goal should be based on your current spending. Adjust for things you don’t expect to have to pay for in retirement: child care or children’s education; maybe you’ll have a paid-off mortgage, etc. And then add some room to spend on yourself: more vacations, more hobby expenses, and the like.
Once you’ve figured out how much you think you’ll spend each year during retirement, multiply it by 25. That’ll get you to a pretty good retirement goal based on the 4% rule. If you want to be extra secure, multiply your estimated annual budget by 30.
With that goal in mind, you can make a real plan to save for retirement for any given time horizon. Just be aware of all the other potential mistakes you could be making without realizing it.
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