Many baby boomers, it’s time to begin planning for your retirement seriously. While you may have already begun building a nest egg, are you sure you’re doing so most organizationally and effectively?
To help guide your savings journey in the right direction, here are some of the most common mistakes when managing an IRA or 401(k) retirement plan.
Failing to Withdraw the Required Minimum Distribution
When you reach retirement age, the IRS mandates that you withdraw a certain minimum amount from your IRA, known as the Required Minimum Distribution (RMD). Nonetheless, many individuals avoid taking out their RMD due to concerns about depleting their savings.
Failing to withdraw your annual RMD can be detrimental to your finances, as it could result in a penalty of up to 50%. This can lead to slower growth and faster depletion of your IRA funds if you do not take the money.
By taking advantage of this tax-deferred opportunity, you are protecting yourself from excessive financial burden and safeguarding the future value of your investments.
Borrowing from Your 401(k)
Your 401(k) was created to support you in retirement planning. However, if a financial emergency occurs before then, it may be tempting to dip into your savings as a solution – which is not recommended!
Taking money out of your 401(k) can have long-term effects on your retirement security and should only be used as an absolute last resort. If you repay the money before retirement, you will incur a penalty fee for early withdrawal and lose out on additional interest from your retirement savings.
To avoid all this unnecessary hardship and financial burden, it’s best to refrain from taking a lump sum of cash out of your 401(k) bank account and look for other means of obtaining extra finances.
Putting Your Money in a Trust
Instead of drawing against your retirement fund, investing the money in a trust for future usage may be an apt solution; however, this carries many of the same risks as prematurely withdrawing from your 401(k).
To begin with, you’ll be faced with taxation costs. Moreover, if you withdraw the money before you are 59.5 years old, you will experience an additional fee of 10%. Allow your wealth to develop naturally, and leave it until you are prepared!
Investing in Company Stocks
Investing in stocks has the potential to make you a significant sum, but if done irresponsibly, it can easily eat away at your hard-earned wealth. This is far from an exact science; it involves taking calculated risks that may or may not pay off.
Financial experts recommend putting 10% of your IRA into company stocks to ensure you don’t suffer massive losses. Companies have good and bad years–sometimes even going bankrupt–which can leave you with barely anything in return for the money you invested.
Investing your savings retirement accounts in a single company’s stock is risky, as former Enron and current Wells Fargo employees can attest. Even when you’re an employee at that particular business, there’s no assurance that what they tell you about the stock performance or prospects is true.
That’s why diversification across multiple assets is so important – much like any other venture in finance. Don’t put all your eggs into one basket!
Not Diversifying Your Portfolio
Tempting as it may be to pour all your money into one investment opportunity that offers the most appealing return, no asset is risk-free. Unexpected circumstances can occur and lead to total loss of funds; this was seen during the 2008 financial crisis when many IRAs and 401(k)s were wiped out in a single day.
To protect yourself from such losses, diversify your investments across different markets – you’ll still have the potential for maximum returns like those available with an IRA or 401(k), but minimized risks too!
With the current market conditions, even bonds – long considered one of the safest investments – are no longer a sure bet. Returns are dwindling while inflation continues to creep up, leading to losses for many investors.
The best approach is diversifying your portfolio by investing in multiple outlets. This way, should any difficulties arise with one particular investment area, you’re only out a manageable sum and have other options on which to rely as a backup.
Don’t let yourself become a victim of the common pitfalls that baby boomer generation fall into while planning for retirement. By taking time to research, stay informed, and make wise decisions concerning your IRA or 401(k), you can maximize your benefits with minimal effort when it comes time to retire from the workforce.
