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Investing & Retirement

3 Easy Ways to Mess Up Your Retirement Savings

6 Minute Read

We’re all human—and that means mistakes come with the territory. Some are no big deal, while others can seriously mess up your future. No one wants that!

So let’s talk preventative measures.

We all know a little knowledge can go a long way in helping you make smart choices with your money. Here’s how three common mistakes can affect your future—and how to avoid letting them wreck your retirement fund.

Borrowing From Your 401(k) to Buy a Home

If you’ve always dreamed of owning a home but just can’t seem to scrape together the money for a decent down payment, your retirement fund can look like untapped treasure. So what would happen if you took out a 401(k) loan to fund your down payment? Let’s look at an example.

Phil is 35 years old and has $50,000 in his 401(k) account. He borrows $20,000 from his 401(k) at 6% interest to cover his down payment on a $200,000 home. To make room for his loan payment, Phil reduces his monthly 401(k) contribution from $750 to $363 for the next five years. Thankfully, he’s still able to continue receiving his full employer match at 3% of his income.

So what’s the damage? According to the National Center for Policy Analysis’ 401(k) Borrowing Calculator, Phil’s loan could cost him more than $535,000 by the time he retires at 65. If he stops his contributions—and his employer match—over the loan period, it could multiply his loss to nearly $890,000. And those figures assume he pays the loan back in full on time!

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If Phil leaves the company before his loan’s paid off, his balance is due within 60 days. If he can’t pay it in full, it’s considered an early withdrawal, and he’ll pay out the nose in taxes and penalties.

According to the Pension Research Council, 86% of workers who leave their job with an outstanding 401(k) loan balance end up in default.

Dipping Into Your 401(k) to Pay for College

We don’t have to tell you that college isn’t cheap. Maybe your high-school graduate is off to the big leagues this fall and their college fund falls short. You might think taking a small chunk of cash out of your 401(k) to make up the difference isn’t a big deal.

Let’s say you have $6,500 in college expenses you can’t cover on your own. You’ve tried every route you can think of and come up empty, so you take a hardship withdrawal from your 401(k). What will that $6,500 cost you?

Assuming you’re at a 25% tax rate, you’d have to withdraw $10,000 out of your 401(k) to have $6,500 left in your pocket after taxes and penalties. But that’s not the worst part. Taking that money out of your nest egg today means you’d be missing out on the potential to see it grow into more than $67,000 over the next 20 years.

Letting guilt endanger your future is never worth it. If you don’t have the cash to cover college expenses, your kid will need to bridge the gap. It might mean taking on a part-time job, choosing a cheaper school, or living at home instead of the dorms. We guarantee paying a few college expenses now will hurt your kid a lot less than funding your golden years later if you come up short in retirement.

Leaving Investments Up to Your Employer

Lots of companies automatically enroll workers in a 401(k) plan these days. And while more people save for retirement as a result, they’re setting less money aside on average than those who choose to invest on their own, according to Vanguard.  

What’s behind the lackluster savings rates? Well, nearly half of automatic enrollment plans in Vanguard’s report set workers up at a 3% deferral rate. That’s nowhere near the 15% you should be investing!

Consider the difference. Sally and Betty are both 30 years old and make $35,000 a year. Sally sticks with her employer’s 3% automatic enrollment deferral rate, while Betty bumps hers up to 15%. Here’s how their retirement funds would compare in 35 years.

Clearly, Betty’s looking at a much brighter future than Sally.

Let’s get one thing straight: Automation doesn’t equal planning. It’s great if that’s what gets you investing in the first place. But don’t just sit back and let your employer set it and forget it for you. Retirement isn’t a game where everyone gets a trophy just for participating. You’ve got to get off the bench if you want a future that wins!

A Better Way to Build Your Future

We’ve shown you just how easy it is to wreck your retirement fund. Now let’s review ways to build a better future.

  • Don’t treat your nest egg like a piggy bank. Your retirement fund needs all the time it can get to grow to its full potential. So how do you beat the temptation to dip into it for life’s emergencies? Wait until you’re debt-free with three to six months of expenses in your emergency fund before investing for retirement.   
  • Diversify your investments. That’s a fancy way of saying don’t put all your eggs in one basket. You can’t protect your nest egg from every bump and bruise, but you can keep risk to a minimum by spreading your investment money around. Look for good growth stock mutual funds with a solid history of strong returns.
  • Keep your hands on the wheel. It’s easy to get distracted by today’s to-do list and let someone else decide your future. But you’re the one who has to live off your retirement fund one day. You don’t have to figure it all out on your own. An experienced investing professional can help you set a realistic goal and outline a clear path to success. Check in at least once a year to ensure your plan stays on track.

If you have questions or you aren’t sure whether you’re getting it right when it comes to retirement, talk to an investing advisor you trust. The right pro puts your best interest before their bottom line and takes time to explain your options in terms you can understand.

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