Retirement is considered a universal goal that everyone has, even those who do not plan to retire ever. It is a point where people can afford to retire and work becomes optional. However, many people make a lot of investing mistakes when it comes to retirement. Retirement investing mistakes come about in two ways, when people do not know what to do and frequently do nothing or when they do what they hear they should do, but it is not the right thing for their situation.

1: Not Saving  Enough

The first retirement investing mistake is not saving enough. The biggest roadblock to not having sufficient money in retirement is not saving enough before retirement. This is often a combination of not starting to save early enough, which then increases the amount they need to save each month, and not saving enough each month, often falling prey to the belief that they cannot save more.

People do not like to make decisions in uncertainty; they like to have their ducks in a row. This is a huge problem when facing long-term faraway goals such as retirement. Often people do not think they will be with an employer for long, so they do not sign up for the employer-sponsored retirement plan for the first seven or 10 years they work there. Or they do not want to admit they do not know which investments to pick, so they put the information packet on the coffee table to look at later, and five years later, it is still somewhere where paperwork accumulates before eventually moving to the recycling bin if it has not gone there already.

The solution is to start and then do more.

It is not possible to know exactly what they need to do, but it is more than they think. If they are young, they should start with at least the amount that gets them a full employer match if it is available. If they are not young and just starting, they should do more than that. A lot more than that.

They can start with index funds or basic age-based portfolios, but they need to be careful of being overly conservative — that is a more frequent problem than being overly aggressive.

Then increase the percentage they contribute each year. For example, if they started with 6 percent of their gross to take full advantage of employer matching, next year they should do 7 percent, the year after 8 percent, and so on.

2: Not Taking Advantage of Employer Matching Funds

The second retirement investing mistake is not taking advantage of employer matching funds. If they are not taking advantage of employer matching funds, they are leaving free money on the table and not saving enough for retirement, as described above.

The most common match is 50 percent on the first six percent of contributions. There are a lot of other matches; everyone should check with their human resources department to find out what it is. We’ll use 50 percent on the first 6 percent for our example. 

In this example, someone puts in six percent of his or her gross pay; the employer matches it 50 percent, which means the employer contributes an additional 3 percent of the employee’s gross pay. The employee’s six percent contribution gets increased by 50 percent right from the start. This is a phenomenal benefit and one most people can’t afford to pass up. 

Everyone should be sure to contribute at least as much as needed to get all the matching funds. In that way, no one's leaving free money in his or her employer’s pockets when it could be in the employee’s.

The third retirement investing mistake is not being aggressive enough in pre-retirement. Many investments or things people consider investments, will not outpace inflation and therefore will not increase their future purchasing power. Cash investments, certificates of deposit, and money market funds will not outpace inflation over time. People are more afraid of losing money than they are of not having enough money, but volatility, which is short-term price fluctuations, is not losing money. An account loses money if there is less money there when they need to spend it. Assets that outpace inflation tend to have some volatility. Investors need to assume a reasonable amount of risk, or their investments will not grow. Most people could never afford to accumulate what they will need to retire using conservative investments. Most people should be more aggressive than they are. Not crazy aggressive, but reasonably aggressive. 

3: Not Being Aggressive Enough Pre-Retirement

There are a couple of concepts that come together here. People can grow their future purchasing power, which is what they get to spend in retirement, by investing to produce returns greater than the rate of inflation over time. Inflation is the general increase in prices of goods and services over time. One can increase his or her purchasing power only by growing his or her investments faster than inflation. There’s no other way.

Many investments, or things people consider investments, will not outpace inflation, and therefore will not increase their future purchasing power. Cash investments, certificates of deposit, and money market funds (both bank money markets and money market mutual funds) will not outpace inflation over time. When someone puts money into these types of investments, they assure themselves that they will only be able to purchase less with their money in the future. This guarantees a loss in purchasing power over time. While it is unlikely that the investments will decrease in face value, it is guaranteed that they will be worth less in terms of spending power.

People are more afraid of losing money than they are of not having enough money. But volatility, which is short-term price fluctuations, isn’t losing money. An account loses money if there’s less money there when someone needs to spend it. Assets that outpace inflation tend to have some volatility. Investors need to assume a reasonable amount of risk, or their investments will not grow. Most people could never afford to accumulate what they will need to retire using conservative investments. Most people should be more aggressive than they are. Not crazy aggressive, but reasonably aggressive.

4: Not Being Aggressive Enough at and in Retirement

There’s also another significant issue. Some conventional wisdom from the 1970s is still being circulated as absolute truth, which is having a negative impact on individuals. At that time, it was common for people to work until their late sixties and pass away in their seventies. Retirement periods were brief. The objective for investments was to safeguard what had been accumulated. Most likely, individuals had a pension as their main source of retirement income, with investments serving as supplementary funds. Conservative investment strategies were affordable during retirement.

But now is not then.

Individuals are retiring earlier and living longer, necessitating the funding of the majority of their retirement needs through their own investments. Rather than passing away after eight to 15 years of retirement, many are living well into their 30th year of retirement or beyond. This changes the situation dramatically. Generally, the advice to be conservative with all of one's investments during retirement is misguided. This advice may be reasonable if an individual has a health issue and is only expected to live a couple more years or if their retirement is unfunded, and they have only saved a few thousand dollars. In these instances, being conservative is appropriate.

However, most individuals will require a significant portion of their assets during the later years of their retirement, which may last for several decades. As a result, they require their money to continue working for them. 

A portion of their funds should be placed in conservative investments to finance the next few years, while others should be invested in moderately conservative vehicles to finance the balance of the next five years or so. Nonetheless, the funds required for 10, 20, 30, or even 40 years into the future should still be invested for the long term, as it is long-term investment money.

 Adopting an excessively conservative strategy too soon may jeopardize one's later retirement years.

5: Not Using Tax-Favored Retirement Accounts

We are fortunate to have tax-advantaged retirement plans to use to help us build retirement assets. We have 401(k)s and 403(b)s that allow us to make pretax contributions and allow our investments to grow tax-deferred.

And we have Roth versions of some accounts that do not allow for pretax contributions, but our investments grow tax-deferred and withdrawals in retirement are tax-free.

Most people who invest for retirement take advantage of one or more of these vehicles. But some resist; they don’t want to tie up the money or have some other bias toward retirement accounts, usually unfounded. 

The ability to use pretax dollars can be a multiplier of results. The claim is based on the following rationale. Suppose an individual determines they can afford to invest $100 per week into their workplace retirement plan. Additionally, assume that they have a combined federal and state marginal tax rate of 33 percent, which is a typical tax burden for many individuals residing in high-tax states.

If an individual invests $100 per week out of their pay, their take-home pay will be reduced by around $67 per week, with the remaining $33 being covered by tax savings. Alternatively, by employing the strategy of pre-taxing, an individual can invest $150 per week out of their pay, which will have the same impact on their take-home pay as investing $100 per week. Therefore, by utilizing pretax contributions, an individual can effectively multiply their results. In this scenario, the individual's $100 out-of-pocket contribution results in a $150 contribution to their investment account because of the impact of tax savings on their contributions.

Honorable Mentions

It would be remiss not to mention a couple of honorable mentions on this brief list of retirement investing mistakes that deserve a place on a longer list.

Failure to plan and failure to plan for inflation are significant problems for many retirement investors.

They do not know what they need, the cost involved, or how hard their money will need to work to achieve their retirement goals, assuming they know what those goals are. Making the best decisions without complete information is not possible.

The solution to this problem can be twofold. Younger individuals in their 20s or 30s can be confident that they are on track if they invest at least 15 percent of their gross income towards their retirement. However, those above their thirties should have some form of a formal financial plan. They may be able to create one themselves, use financial calculators or seek assistance from a financial advisor.

Another honorable mention is debt and other excessive expenses.

Some individuals may choose to live in debt, putting their retirement at risk of financial instability. Debt can severely impact one's financial health and become an obstacle in achieving a comfortable retirement. While a reasonable mortgage or car payment may be acceptable for most middle-class earners, consumer debt is generally not recommended, especially during retirement. It's essential to address the drag of debt as early as possible to avoid carrying it into retirement. It's advisable not to start retirement with the burden of debt on one's shoulders.

The Bottom Line

Retirement is the universal goal; we all want to get to a point where we can live free of financial concerns.

It is one of the most important things people will ever undertake in their financial lives.

Since we are dealing with uncertain futures, we’re bound to make some retirement investing mistakes, but we don’t need to make unnecessary mistakes. 

We need to save enough, we need to take advantage of pretax accounts as a results multiplier, we need to take advantage of company matching, and we need to accept a degree of investment volatility to produce long-term results both before and during retirement. The basics are there; we just need to do them. In many cases, we can do better with a formal plan in place: one of our own designs if that’s our bent, or one done by a professional if that’s best for our situation. Retirement, one of our most important goals, should not be left to chance.

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