9 Ways You’re Blowing Your Retirement Savings

When it comes to retirement, there are plenty of steps you can take over time to give yourself the best chance for success. Unfortunately, there are some actions you can take that can actually blow your retirement savings – mistakes you definitely want to avoid.

Introduction

We all have our strengths and weaknesses in life, which makes each person unique. A key manor in which to succeed in life is learning your strengths and then playing to them to the fullest extent possible, while limiting your actions and activities where you are less competent or comfortable.

Many people don’t feel comfortable or competent when it comes to their finances, so don’t be embarrassed if you find yourself in that boat.

While there’s no shame in being among that group, which encompasses vast numbers of Americans, you do want to avoid some of the oft-repeated major blunders that can cost you big time in terms of your finances, especially when it comes to your retirement savings.

Moreover, it’s important to remember that your decisions and actions today and going forward can have a major impact on your financial future (e.g., your actions today are connected to the amount of money you have available in the future), so it’s best to approach them wisely.

The following are mistakes you should avoid because they can blow your retirement savings:

Lack of contributions

Failing to contribute to your retirement savings in any year, let alone each year once you start working or at least by the time you reach your mid-20s and onward, is a mistake – much like shooting yourself in the foot.

To be honest, your goal should be maximizing your contributions each year.

In 2023, both you and your spouse can contribute up to $22,500 each into an employer-sponsored plan, such as a 401(k). And if you are both 50 years of age or older you can each contribute up to $7,500 in a catch-up contribution, bringing your maximum annual contribution to $30k each.

Additionally, you could potentially contribute up to $6,500 each to your IRAs, as well as an additional $1,000 in a catch-up contribution (if age 50 and older), bringing your total IRA contributions to $7,500 each in 2023. (Note, there are phase-out provisions on how much in total can be contributed by an individual or both spouses, as well as income limits. Learn more here.)

There’s also the issue of matching by your employer and that of a spouse, if they offer such a program. This is generally based on a percentage of your annual compensation.

According to a T. Rowe Price 2021 report, the average employer matched between $0.50 to $1.00 for each dollar contributed by the employee, up to an average of 4.5-percent of their annual compensation. Some employers match up to six-percent and even higher. Not to take advantage of the match is a mistake and basically throwing money away.

Even worse, not contributing to your retirement savings and maxing those contributions (combined with those matches by your employer) robs you of a lot of money you’ll eventually want to have available once you retire.  Same holds true for not maxing out your annual contributions to IRAs.

Two other quick points:

• The more you contribute each year to a qualified retirement account (e.g., 401(k), IRA), the more you reduce your taxable income for the year, in which case you will pay less income tax in that year
• You gain more ability to take advantage of compounding interest and the associated increase in tax-deferred savings – a major component in wealth building

Don’t make the mistake of missing out on these major benefits.

Debt

Yeah, yeah, yeah… You’ve heard it plenty of times before. Get rid of your debt and definitely don’t carry any of it into retirement. Sounds a lot like “Eat your peas and carrots” you heard when you were young.

Well, like it or not, there is a reason that bad debt is destructive when it comes to savings. Be it high-interest credit cards, autos, furniture, personal loans or any other type of consumer debt, it acts as a major drag on your ability to save.

Not only does it reduce your monthly cash flow, but it actually impacts your ability to cover key areas like housing, emergences and especially health care, which is very likely to increase in cost as you grow older.

It can also eliminate your ability to do things you always wanted to do in retirement, such as travel, leisure and just relaxing without worrying about having the money to do so.

When it comes to debt, housing and related costs are the number one expense for retirees, so it makes sense to pay your mortgage off before retiring, if that is possible. If you can’t pay it off, at least down as much as possible. And remember you will still have expenses such as home insurance, property taxes, maintenance, repairs, and more, all of which will continue if and when you do pay that mortgage off.

Aside from effecting your current budget, debt can inhibit your from continuing to invest new dollars into your retirement accounts, thus eliminating your ability to accelerate your retirement savings – dollars you may need later in your life.

Failing to diversify and protect your portfolio

While investing your hard-earned dollars in order to grow retirement savings is a good thing, you have to be careful to diversify when doing so to avoid placing your money at undue risk. The old maxim is true in terms of placing all eggs in one basket. This can include investing in a single security or limited types of assets.

Another common scenario is that of receiving stock as a part of a matching program (even bonuses) from an employer. While a benefit on the one hand, it can lead to the serious problem of overallocation and exposure if that particular security corrects, which can occur over time.

Fact is that diversification spreads your money and reduces your risk when done properly, but most individuals fail to recognize correlation between the assets held in their portfolio (all eggs in one basket syndrome), which can lead to big losses in your retirement savings when inevitable corrections or adverse events occur.

A good example of proper allocation combines a mix of instruments, which can range from stocks, bonds and mutual funds to real estate, dividend-producing equities, ETFs, CDs, and much more. While such a mix can provide the diversification you’ll need, it’s no easy feat to construct such a portfolio…and to continue to adjust it over time and as market conditions change.

For most people it’s best to work with a qualified advisor to ensure their money is properly allocated (avoiding correlation), addressing risk while enabling the growth of savings as safely as possible.

Spending too much on taxes

The last thing you want to do is pay Uncle Sam any more than is necessary during retirement. This can add up to tens to even hundreds of thousands of dollars over time for some people.

A common mistake is failing to take advantage of a Roth IRA conversion if you are eligible to do so. While you must have a time horizon of more than five years, and have the ability to pay taxes now, the ability to take distributions tax free in the future can offer considerable savings down the road.

Another common mistake is taking assets out of your portfolio in the wrong order. Taking distributions from post-tax accounts first and leaving assets in pre-tax qualified accounts (examples – 401(k), IRA, etc.) can lead to large tax bills later. Often it’s more tax advantageous to strategically take distributions from a mix of qualified and non-qualified accounts now and in the short-term.

Overall, failing to work with an advisor or accountant to institute a tax strategy that can limit your tax obligations over the course of your retirement can cost your dearly.

Spending too much on family

It’s natural for many people to want to spread the wealth, as it were, which can include spending on their children and other family members.

Whether it’s meant to help with education costs for their kids and grandkids, assisting with their bills, purchasing big-ticket items for them (house, cars, trips), pampering, and more, those dollars outlaid often can’t be replaced or recovered.

Not only are your savings reduced accordingly, which can impact your quality of life in retirement, but you also reduce the amount of savings that can be grown over time due the benefit of compounding interest.

Bigger and better can be costly

While the whole point of saving for retirement is to grow your money, seeing your account balances increase in value can lead to the temptation to spend.

A bigger house, a more expensive car, joining the country club, and in general packing on more expenses is a trap many fall into because they finally have the dollars to do so.

At a time when you might want to consider downsizing, the extra dollars spent can be a drain on the money available for retirement, which can lead to a delay in your retirement or being forced to live at a lower standard of living than accustomed to or envisioned.

Gambling with your health

According to the Center for Disease Control (CDC), a significant number of people in the U.S. are uninsured. Their report, “Health Insurance Coverage: Early Release of Estimates from the National Health Interview Survey, 2022,” estimates that 12.2-percent of working age Americans (ages 18 to 64) did not have health insurance in 2022.

If you are nearing or in retirement, this is equivalent to rolling the dice – a gamble not worth the risk. While health insurance is an expense most would prefer to avoid, just one health event can destroy your savings and impact your ability to ever retire.

Borrowing from yourself

When you are in the midst of day-to-day living, challenges often arise that require our attention, and often our dollars.

The need to upsize our home (e.g., adult kids moving back home or taking care of our own parents), purchasing a car, dealing with unexpected health and other expenses we can’t cover within our budget, school and related costs for our kids, taking care of grandkid, etc. You name it, the list can seemingly go on and on.

When you are facing any of these types of issues, it can be very tempting to look at your retirement savings as a piggy bank.

It’s easy to think, “This is my money and I need it now, but I’ll repay myself later,” but doing so is often another matter altogether.  Borrowing our own money is not a rare occurrence. According to the Transamerica Center for Retirement Studies 2023 Survey, approximately 37-percent of American workers have taken a loan, hardship or early withdrawal from their retirement accounts.

No matter the circumstance, many of which are reasonable, and at times unavoidable, the reality is your savings are depleted and there’s a good chance you might not be unable to replenish those funds in full.

The net effect is fewer retirement funds, which means you make less (less dollars = less compounded interest) and you can actually be liable for plan and/or IRS fees, fines and penalties, further reducing your savings.

You have to seriously consider the consequences before dipping into your savings.

One other related issue is that of disasters and rainy days. This can range from health issues, a layoff, the sudden need for an AC or roof repair, and myriad other scenarios. While saving for retirement should be a priority, you should also consider putting aside separate funds to cover the unexpected so that you aren’t forced to borrow from your retirement accounts.

Schemes, scams and fraud

One last consideration is that of falling prey to fraud, schemes and other pitfalls. There has been a proliferation of fraudulent activity as people spend more time on the Internet, which can trip up even the most sophisticated technology users.

Ranging from get-rich-quick schemes, malware, phishing, email scams, stealing personal/financial information, and much more, we live in a “buyer beware” society at this time.

As such, it’s imperative that you remain vigilant against such activities and be sure to utilize best practices to protect yourself.

This should include frequently changing passwords, utilizing a credit monitoring system, checking financial accounts and balances daily, investigating opportunities before investment, and more.

Be skeptical, and when unsure contact a trusted family member or advisor before moving forward with any opportunity or providing your personal and financial information.

Aside from getting scammed or burnt, a loss to your savings can be hard to recover from financially, especially the older you get.

Conclusion

Obviously there are all kinds of curveballs in life and we all have to do our best to adjust and roll with the punches. Some things we can’t change and are a reality that we have to deal with.

That said, there are many things you can do to help mitigate potentially bad outcomes, which includes sidestepping avoidable mistakes that can impact your life. Avoiding financial mistakes as you approach and/or enter retirement is certainly an area you need to focus on to ensure such pitfalls don’t undermine your ability to enjoy a successful retirement.

You can deal with some of these issues on your own, such as restricting yourself from overspending on your kids or family member (while still being extremely generous) and being skeptical/investigating “too-good-to-be-true opportunities.

But in other areas, you’d probably best be served utilizing the services of a qualified advisor or retirement planner, as they can help you save taxes, efficiently and safely grow and maximize your savings, and help you successfully navigate retirement.

At Oak Harvest we can help you avoid blowing your retirement savings. We offer tools and learning resources you can utilize to educate yourself regarding many of the mistakes to be aware of and avoid. And we can build a holistic, comprehensive retirement plan addressing relevant issues, utilizing strategies that cover taxes, income, spending, healthcare, legacy, and more, customized to your family’s specific needs.

A plan created with the goal of ensuring you have the best opportunity of living out the retirement you and your spouse envision.

If you are ready to take the next step and talk to a team of retirement planners who can advise on all your retirement needs, and who will put your interests first, Schedule a call today!