Whether you’ve saved $1,000 or $1,000,000 for retirement, there are common mistakes many people make. Tony Drake, CFP® talks with WTMJ on the Retirement Ready radio show about how to get your retirement back on track.
1. Early Withdrawal Penalties
There are a lot of rules and penalties involved when it comes to withdrawing money from your retirement account before a certain age. It’s important retirement savers understand those rules if they want to keep their retirement plan on track. If you decide to tap into your IRA or 401(k) before age 59 ½, you need to be aware that you will face an early withdrawal penalty. Generally, you will have to include that money in your gross income and will have to pay a 10% additional tax penalty.
If you decide to take $50,000 from your 401(k) savings, you might really only get $35,000 in cash after 20% withholding and a 10% early withdrawal penalty. These fees and penalties can really take a chunk out of their savings. There are some exceptions to the early withdrawal penalties. We recommend consulting your financial professional before deciding to withdraw money from your retirement account.
2. Missing the Employer Match
While pensions are quickly becoming a thing of the past, many employers still offer 401(k) plans and a company match. A recent survey shows 1 in 5 workers is not contributing enough to their 401(k) or employer-sponsored retirement plan to get the full match from their employer. What’s worse, 25% of baby boomers are missing that match.
Double-check with your human resources department to make sure you are getting your full match. And if you aren’t, set a goal to gradually bump up your 401(k) contributions to meet the match threshold. Take advantage of this free money from your employer!
3. Investment Fees
It is important to know how much you are paying for your investments. Excessive fees can eat away at your savings. Investment costs that sound small – like 2% – can take a chunk out of your savings over time. Those fees compound along with your returns. That means you aren’t just losing money in the fees you pay, you are also losing the growth that money could have had.
4. Ignoring Compound Interest
Compounding is one of the best arguments for saving early. On a very basic level, compound interest is earning or charging interest on top of interest. Here’s a simple example:
If you have a savings account that earns 1% interest once a year, and you put $1,000 into it, after the first year, you will earn $10 in interest. If you leave that money in your account for another year, you will be earning interest on the original balance plus the $10 in interest you earned the first year. So, the interest in the second year will add up to $10.10. Keep in mind, you need to keep the money you earn in the account in order to capitalize on compound interest, so resist the temptation to withdraw.