How to Sabotage Your Retirement

According to the Federal Reserve, less than 40% of non-retired adults believe their retirement savings are on track. But none of the remaining 60% likely set out to sabotage their retirement. Unfortunately, it's all too easy to make the wrong financial moves when preparing for retirement. Start (or continue) your journey by sidestepping these financial mistakes.

The average worker changes jobs about a dozen times during their career. Many do so without realizing they are leaving money on the table in the form of employer contributions to their 401(k) plan, profit-sharing or stock options. It all has to do with vesting, which means that you don't have full ownership of the funds or stock that your employer "matches" until you have been employed for a set period (often five years). Consider whether leaving those funds on the table is worth the job change.

Thanks to compound interest, every dollar you save now will continue growing until you retire. There is no better friend to compound interest than time. The longer your money accumulates, the better. Examples of spend now – save later include remodeling or adding on to a home you will only live in for a few years or financially supporting adult children (Note: They have longer to recover than you). Cut back on expenses and prioritize saving. Most experts suggest at least 10% to 15% of total income should go into retirement savings over your working life.

To avoid sabotaging your retirement and running out of money, create a plan that considers your expected life span, planned retirement age, retirement location, general health and the lifestyle you would like to lead before deciding on how much to set aside. Update your plan on a regular basis as your needs and lifestyle change. Seek the advice of a trusted financial planner to ensure your plan makes sense for you.

If your company offers a 401(k), sign up and maximize the amount you contribute to take advantage of the entire employer match if available. If there is no 401(k), take out a traditional or Roth IRA, but realize that you will have to save more since you are not getting matching funds from your employer.

Whether it’s a company retirement plan, traditional, Roth or self-directed IRA, make smart investment decisions. Some people prefer a self-directed IRA because it gives them more investment options. That’s not a bad decision, provided that you don't risk your savings by investing in “hot tips” from unreliable sources: think investing everything in bitcoin or other ultra-risky options.

For most people, self-directed investing involves a steep learning curve and the advice of a trusted financial adviser. Paying high fees for poorly performing actively managed mutual funds is another unwise investing move. For most people, better options include low-fee exchange-traded funds (ETFs) or index mutual funds. Your 401(k)-plan sponsor is required to send you an annual disclosure outlining fees and the impact those fees have on your return. Be sure to read it.

Rebalance your portfolio quarterly or annually to maintain the asset mix you want, due to changing market conditions or as you approach retirement. The closer you are to retirement, the more you will likely want to scale back your exposure to equities while increasing the percentage of bonds in your portfolio.

If you believe your tax bracket will be higher in retirement than during your working years, it may make sense to invest in a Roth 401(k) or IRA, as you will pay taxes on the front end and all withdrawals will be tax-free. On the other hand, if you think your taxes will be lower in retirement, a traditional IRA or 401(k) is better since you avoid high taxes on the front end and pay them when you withdraw. Taking a loan from your regular 401(k) could result in double-taxation on the borrowed funds, since you must repay the loan with after-tax dollars and your withdrawals in retirement will also be taxed.

If you cash out all or part of your retirement fund before 59 ½, your plan sponsor will withhold 20% for penalties and taxes, so you won’t receive the full amount. You will lose future earnings since most people never catch back up. Leave less than $5,000 in a company account when changing jobs without specifying treatment and the plan can open an IRA for you. That can result in high fees that could lower the balance of your savings. If you take money out to roll it over to another qualified retirement account, you have 60 days to do so before taxes and penalties kick in. Request a direct rollover or trustee-to-trustee transfer to eliminate the 60-day rule.

Driving up debt ahead of retirement could have a negative effect on your savings. Have an emergency fund to avoid last-minute debt or drawing down your retirement savings. Pay off (or at least pay down) debt before you retire. Experts caution you should not stop saving for retirement to pay off debt.

According to Fidelity, the average couple spends $280,000 on health care in retirement (not counting long-term care). Stay healthy to lower that figure. Keep in mind that Medicare only covers about 80% of retirement health care costs. Plan to purchase supplemental insurance or be prepared to pay the difference out of pocket.

The longer you wait to file for Social Security, the higher your benefit will be (up to age 70). You can file as early as age 62, but full retirement occurs at 66 or 67, depending on your birth year. It’s best to wait until age 70 to file to receive maximum benefits. 

No matter where you are on the retirement continuum, you have likely made mistakes along the way. If you don’t have enough saved, try to save more starting now. Take on a part-time job and put that money into your retirement account. Dedicate any raise or bonus to your investment fund. In addition to avoiding the problem areas above, seek advice from a trusted financial adviser to help you get back on track and stay there.