When saving for retirement, we all want our investments to grow as much as possible. Even with good intentions, many people can fall into mistakes if they’re not careful. Approximately 23% of working Americans have said they feel "very confident" they’ll have what they need to enjoy retirement comfortably. But what about the other roughly 80%? By knowing what these five pitfall are, it’s easier to avoid mistakes and to keep your retirement making as much money as possible over the years.
Pitfall #1 - Maximizing Your Contributions too Late
Compounding is a beautiful thing, the problem is, most people don’t start early enough to get the most out of it. Delaying contributions for even a few years can make a big difference. When you start early and dedicate the maximum amount you can to your retirement plan, you get the benefit of having more time for the initial investment and its potential interest or earnings. These compound on a tax-deferred basis. Compounding keeps building on itself, creating a greater and greater amount of money in the account.
Pitfall #2 - Not Creating Specific Goals
It’s estimated that during retirement, a person will need 80% of what their income was before retiring. That figure is per year and includes being able to cover things like monthly bills, health insurance, vacations, etc. Having a plan for how much you’ll need is the first step. Once you have that in place, you can figure out where you are now, and what you need to do to get to where you’re going.
Pitfall #3 - Worrying About Market Volatility
Historically, the stock market goes up and down just like a roller coaster. It’s anyone’s guess as to how long it will be up or down. The problem is when people worry the stock market won’t go back up. The truth is that stocks produce stronger earnings than most fixed income investments. Even if the market goes way down, it has been shown historically that it will go back up, many times surpassing what it had been before the fall. If you haven’t considered investing in stocks, now is the time to consider it.
Pitfall #4 - Thinking You Can Time the Market
People have tried over and over again to time the market. They base their investing on daily price swings. Overall, this isn’t a good way to think about investing. Unless you have a way of knowing the future, timing the market can be a risky thing to do with your hard earned money. Instead, the best option is to buy and hold any investments you make for at least a few years.
Pitfall #5 - Not Diversifying
When someone invests in only one type of asset class or fund, it can leave that money vulnerable. When you choose multiple investments and spread the money out, it can help to prevent loss if there are any periods of market volatility. This is called diversification. Investments that might be losing money are often countered by investments that are gaining in different sectors.
If you can invest while managing to avoid these five pitfall, you will likely see your nest egg grow exponentially. Knowing how your investments work and how to protect your money is key to having a successful portfolio that is where you want it to be when you retire.