Learning how to start saving for retirement is one of the most important and impactful things you can do with your money. Successfully planning for the “golden years” requires a commitment to both building up a healthy amount of retirement savings, as well as investing that savings to ensure it provides you the lifestyle you deserve.
Unfortunately, missteps taken with your retirement investment strategy can eat into that retirement savings. And without a focused, cohesive approach — based on sound, timeless principles — you can find yourself in serious trouble during your retirement years. (Mistakes that can hurt your nest egg, no matter how early you started saving for retirement.)
Here are four key investing mistakes to avoid when building up your retirement reserves and designing your ideal post-working years.
5 Retirement Savings Killers
1. Relying on savings
Perhaps the biggest mistake most Americans make with their retirement investment strategy is not having one, instead relying on simple “savings” to carry them through the day.
This is understandable since most of us were taught, from an early age, that saving is a good financial principle that will prepare us for when it comes time to retire.
But let’s say an individual planned to retire today, at age 65, and had saved $120,000. (Quite a nice sum of money.) That “nest egg” would only provide them an extra $400-$500 a month during their retirement years. Hardly enough to cover a grocery bill, let alone a comfortable retirement lifestyle.
Instead, you should see saving for retirement as just the first step; a key first step, but a first step, nonetheless. Which when directed towards investments that create continuous cash flow — not just lump sums of money — can create the building blocks to your retirement financial goals.
2. Not diversifying your portfolio
The correct term may be “investment portfolio diversification,” but it’s really no different than that old sage piece of advice: “Don’t put all your eggs in one basket.”
You want your retirement portfolio to be robust, and have plenty of diversity so as to reduce potential volatility that may come from one particular segment of portfolio.
This means your retirement portfolio is recommended to have some mix of the following:
- U.S.-based stocks
- Foreign-based stocks
- Treasury securities
- Retirement real estate investment (Rental properties, commercial properties, etc.)
- Real estate investment trusts (REIT)
And when we say retirement real estate investments we do not include the house you’re living in. Too often people planning for retirement will “over-invest” in their own home, equipping it with the latest improvements and additions, thinking it will boost the value of the home and allow them to sell it a premium or borrow against its equity.
A better strategy is to take that surplus and invest it in passive income streams, such as rental properties. That way you’re using a retirement and real estate strategy to build wealth and take advantage of the numerous tax benefits afforded you.
3. Relying on your 401(k)
You’ll notice what we didn’t include in the diversification strategy noted above: your company-based retirement account. Even with company matches, there are some inherent problems with the 401(k) model as a retirement savings generator:
- You don’t know where the money is invested. You don’t have control over the asset allocation or whether the fund manager is focused on short-term or long-term growth.
- You’ll pay tons of hidden fees and administrative costs. 401(k) plans are expensive because they require a lot of compliance. Much of this cost is passed on to you, the participant.
- Tax implications you may not know about. One of the key selling points of a 401(k) is your ability to save money, pre-tax. Unfortunately, when you remove money from the account, you will be taxed at a personal income level. (Rather than the more favorable capital gains level.) This can mean thousands of dollars in extra taxes paid.
A better option is to direct that money toward a more flexible, wealth-building retirement vehicle such as a self-directed Roth IRA. As the name suggests, “you” direct where your money is invested. (This makes it a great way to invest in things like real estate and partnerships.) That’s because though Roth IRAs provide no benefit on initial contributions, earnings and withdrawals made within an IRA are usually tax-free.
However, because these type of accounts are self-directed, this means you must do your due diligence to ensure the investment is sound and meets your particular investing needs. With that added freedom comes the added responsibility of being in charge of your own financial investing. Be sure you do your research before embarking on any investment of this kind.
4. Paying more than your fair share
We all have a legal (and moral) obligation to pay our fair share of taxes and fees. But paying more than that is not only needless, it can eat away at your wealth.
Perhaps the biggest “fee” of all is taxes. The best strategy is to try to move your money from what are called “forever tax accounts” to “never taxed accounts.” Converting your traditional IRA or 401(k) into a Roth IRA, as we suggested earlier, may incur an initial tax, but then you’ll be reducing your tax liability in the future.
But taxes don’t just affect you, your heirs will pay a hefty tax bill when your estate has passed on to them. One way around this is to invest in life insurance. Insurance policies, like retirement accounts, are protected from creditors and bankruptcy. (In addition, with the help of an expert, you can set up policies that grow, tax-free.)
The Middle Way
Like most things in life, boosting your retirement savings requires a balance of both risk and caution, aggressiveness and conservatism, boldness and deliberation. Without proactive investments, your “nest egg” will quickly get whittled down by day-to-day expenses. But become too hasty in your investing, and proceed without doing your homework, and you’ll find your retirement investing strategy marred by mistakes.
By cultivating a balanced approach — a middle ground of retirement planning that keeps your portfolio diversified, free of needless fees, and not dependent on others — you’ll boost your chances of creating that retirement lifestyle you’ve always dreamed of.