If you are looking for that retirement on the beach some day, then you need to stop sabotaging your retirement. You need to financially grow up and start making smart money moves. Here are 5 Ways Parents are sabotaging their retirement:
Retirement Money is in Money Market Accounts
Your retirement accounts are meant for growth, not to be put in cash. Too many people have the majority of their contributions in money market accounts (which is basically a savings account) where the average returns are historically 2-3% – barely enough to keep up with inflation.
Again, the purpose of a retirement account is for growth and a savings account won’t accomplish growth. Let’s look at two parents: = Dumb Don invests $100 a month for 30 years in a 2% money market account and Smart Sally invests $100 in a diversified portfolio that earns just 6% a year (which is still really, really low).
Dumb Dan will have invested $36,000 and end up with $49,655.
Smart Sally will have invested the same amount, but have $100,561.
Stop the madness and diversify your portfolio in stocks, bonds, cash, and real estate. You need the extra return if you plan on retiring!
All of Your Money is in Company Stock
Having all of your retirement money in company stock is dangerous. It is the equivalent of putting all your money on one number at the roulette table for 30 years and hoping you’ll get big returns!
We have all heard the stories from people at Enron and Worldcom, but there are thousands of more people who have lost their life savings because of overconfidence in their own company. I lost over $30,000 by keeping a majority of my retirement money in company stock. Luckily it happened to me at 27 and not 66!
The point is don’t have too much confidence in your company stock and never have more than 10% of your portfolio in that stock. I know there will be some people in your company who brag. However, avoid your temptation and diversify.
You will thank me at retirement.
Many investors think they are diversified because they have mutual funds. However, when we dig deeper most portfolios are filled with mutual funds in the same asset class.
This means the average investor has a portfolio filled with large cap value stocks (like companies in the S&P 500) and maybe a few growth stocks. This is not truly diversified.
A truly diversified portfolio spans several asset classes that includes value, growth, international, ect. The chart on SeekingAlpha.com does a great job at detailing the different asset classes (http://seekingalpha.com/article/1928381-asset-class-returns-from-2004-to-2013).
As you will notice a diversified portfolio has less ups and downs than one asset class. This is important as you determine your asset allocation.
Early Withdraw from Your Retirement Account
Nooooooo…..Just Don’t Do it!
I know you may really need that new flat screen, curved T.V., but withdrawing from your IRA or old 401(k) is not solution! Withdrawing money from your retirement accounts before 59 1/2 (unless you are using the rule of 72(t)) is like stealing from your future self.
When you withdraw that money, the government is going to take 10% off the top. Then they are going to tax the money as ordinary income. This is already bad enough because if you withdraw $20,000 early; you will only have $15,000 left over after taxes and penalties.
The bigger problem is the compounding interest you will lose. If you took $20,000 out of your account at 40, then you will lose over 25 years of returns, dividends, and compounding interest. You will actually lose out on $136,969. That’s a big chunk out of your retirement.
Don’t Take Advantage of the Company Match
The company match is the BEST thing in the world. Where else can you put in a dollar into something and someone else will give you a dollar?
A typical employer match will give you one dollar for every dollar you contribute up to 3% and then match .50 on every dollar for the next 2%. Confused? Probably.
Here is the math:
Let’s assume you earn $50,000 and contribute 5% of your income (which you should) – that’s $5,000. Your company will then match dollar for dollar on the first 3% which is $1,500. Then they will match .50 for the next 2% which is another $500. So you will have a total of $7,000 being contributed to your 401(k) every year.
Side Note – In 25 years you would have $688,429! Cha-Ching!
If you just stop doing these five things, you will be on track to a better retirement.