Avoiding investing potholes
Investing mistakes can cost investors lots of money and even derail plans for retirement.
Take unadvertised fees, for instance. Paying an additional 1 percent in fees every year over the span of a career can lighten your account by tens of thousands of dollars at retirement.
Similarly, investing too conservatively is riskier in the long run. When investors ignore unseen sources of risk, they hurt themselves. Since the market crash in 2008, many investors have been hesitant to take risks with their portfolio because they don’t want to lose money.
Learn how to avoid these seven biggest investing mistakes so you can reach your retirement goals.
Not taking full advantage of tax breaks
A person’s actual investments can be less important than the types of accounts used for retirement investing.
The tax-favorable 401(k) plans and individual retirement accounts, or IRAs, are a huge leg up in getting to retirement because they enable your tax-deferred earnings to compound.
It’s unwise to pass up the opportunity to invest in a plan when your employer matches a portion of your contributions. That’s because you’re passing up free money — the equivalent of refusing a salary increase when it’s offered.
Not saving enough — or at all
Once you sign up, figuring out the best amount to contribute is the next hurdle. Unsurprisingly, most people don’t contribute enough.
The average contribution rate is 6 percent, says Anthony Webb, former senior research economist at the Center for Retirement Research at Boston College. Combined with a typical 50 percent match from the employer, the average employee saves 9 percent of salary annually.
High fees in retirement plans, investments
From the expenses charged by mutual funds to record-keeping costs, fees add up. That translates to fewer dollars available for compounding and a lot less money at retirement.
Plan fees can run as high as 4 percent, but “an acceptable level is around 1.5 percent for everything,” says Craig Morningstar, chief operating officer at Dynamic Wealth Advisors. That includes the mutual fund fee known as the expense ratio.
If plan fees are unreasonably high, participants should also ask if the plan is working with a professional plan fiduciary. A professional fiduciary can save a plan enough money to more than make up for their expense.
Workers can most easily control mutual fund costs by making smart investment choices. Since high fees can negate any outperformance above benchmarks, low-cost index funds are generally the best bet.
Focusing on only one risk
Most people need to get substantial returns on their portfolio to arrive at retirement with a decent-sized pot of money. That means investing in stocks is prudent for most. However, some people believe they can get by without investing in stocks at all.
Avoiding stock market risk increases other types of risk, like the possibility of outliving your money.
Then there are the investors who follow the herd as the market is going up, investing in hot sectors on a whim, often taking on more risk than they might otherwise.
In a similar vein, there are savers who manage to sock away money, but never come up with an investing plan.
Retiring with no plan for income
Retirement is a gradual process that involves some planning. Ideally, people begin to transition their portfolio into retirement mode years before they actually retire.
Throughout their career, workers have lots of time to save money and wisely invest in a range of assets. As retirement nears, the mix of investments needs to change, moving away from growth in accumulation toward a distribution and preservation stage.
Investors should rebalance their portfolio to make sure their risk tolerance matches their age and timeline to retirement. That usually means scaling back equity exposure and increasing the amount of bonds in the portfolio.