12 ways to screw up your retirement savings

By Brett Arends

It's easy to make mistakes when saving for retirement - even when you have money to invest

If you don't have a retirement account or a retirement plan and you don't know where to start, you are far from alone.

According to Federal Reserve survey data, about a third of Americans who own their own homes don't have a retirement account. Nor do about two-fifths of all Americans in their 40s, 50s and 60s.

How do even those people who have money mess up saving for retirement? Let us count the ways.

1. Not even bothering to save

This might happen because you read ridiculous articles suggesting you'll need millions of dollars to retire. Some people figure, "I'm not even going to try," says David John, a senior policy analyst at AARP. The solution? Stop believing those ridiculous articles.

2. Figuring you don't need to save because you're never going to retire

"The truth is, many people ultimately will not be able to make the decision to retire," warns Crystal McKeon, a financial planner at TSA Wealth Management in Houston. "They could be forced to retire because of health issues, layoffs or other situations outside of their control."

3. Underestimating your needs

Social Security will typically replace only about 40% of your preretirement income. The rest you have to come up with yourself. And your retirement may be a long one: Nearly a third of those who make it to age 65 can expect to live into their 90s, according to federal data.

4. Not automating your savings through payroll deductions

If you don't see the money, you're less likely to spend it, says AARP's John. For those who don't have access to an automated plan like a 401(k) at work, he says, "the best thing to do ... is open an [individual retirement account] and fund it with direct deposits from your bank account."

5. Putting it off

Sorting out your retirement plan may seem, in President Dwight D. Eisenhower's famous phrase, "important but not urgent." But it's both. Thanks to the power of compounding, the earlier you start investing, the more money you'll have. Someone who starts at age 25 instead of 30, investing the same amount, can easily end up with a third more money in their account by age 65. The best time to start saving, says Daniel Lash, a partner at VLP Financial Advisors in Vienna, Va., "is now."

6. Overcomplicating it

Do the financial pages cause your eyes glaze over like crockery? You are not alone. But never fear: As multiple analyses have shown, most financial "experts" do worse picking your investments than a monkey throwing darts, blindfolded, at the stock pages of Barron's. Meanwhile, over the course of a half-century, you could have made a 7,000% return on your money through a ridiculously simple low-risk portfolio of just two investments: 60% in a global stock-market index fund, such as Vanguard Total World Stock VT, and 40% in 10-year U.S. Treasury bonds IEF.

7. Turning down free money

"When your employer has a 401(k) with a match, that should be a place you automatically put your money," McKeon says. Missing out on this is "one of the biggest mistakes I see inexperienced investors make," she says. (A match is when an employer puts money into a retirement plan when an employee does.) Meanwhile, for those workers earning the lowest wages, the government's saver's credit is a straightforward freebie.

8. Chasing hot investments

"Beginner investors also seem to be more taken in by get-rich-quick, very risky and fad-type investments," says McKeon. "They get a little bit of money together, and whatever investment is hot now seems like the smart place to put your money." It generally ends in tears. And often, sadly, it ends in a double loss: The burnt investor then swears off the stock market forever - missing out on big, simple, long-term returns.

9. Chasing the market

Typically, ordinary investors get most enthusiastic about investing in stocks only after they've risen. Then they panic and sell after the stocks fall. Buying high and then selling low is a guaranteed way to do worse than the market over time.

10. Investing in cash instead of stocks because it's 'safer'

This is a common mistake and a disastrous example of false prudence, says AARP's John. The result is that "you retire with what you contributed rather than the growth you need," he says. Over a 35-year investment horizon, an investment in the MSCI World global stock index has typically generated four times the total profits of an investment in Treasury bills.

11. Holding too much in your own company's stock

The legal structure of 401(k) plans makes this easy to do. It may feel safe, but it can be anything but, warns Sandy Adams, a wealth adviser at the Center for Financial Planning, an advisory firm in Southfield, Mich. You already get your salary, benefits and possibly a future pension from your employer, she says. Owning its stock too is risky, because it places too much of your retirement security on a single company. Behavioral economists call it "familiarity bias" when people tend to invest heavily in what they know instead of being diversified.

12. Not having any kind of retirement plan

This means not sitting down and working out how much money you are likely to need, when you are likely to need it and how you plan to get there. "People have investments but no plan for how they will be used, how much income they will provide or how to optimize taxes," says Ed Snyder, co-founder of Oaktree Financial Advisers in Carmel, Ind. "I call this numbers on paper. Just yesterday I met with someone who told me he knows what their account balances are but he doesn't know what that means."

Lash adds a common mantra in the industry: "Failing to plan is planning to fail."

When it comes to saving for retirement, surprisingly large oak trees can grow from very small acorns. Consider someone who earned the median U.S. income for a full-time worker over the last 35 years and saved 15% of that in a simple two-fund portfolio: 60% global stocks and 40% U.S. 10-year Treasury bonds. Today they'd have a portfolio of $600,000 - enough to buy a guaranteed lifetime income in retirement of $3,000 a month, plus a 2% annual increase to cover inflation.

The average Social Security benefit for a retired worker today? Just $1,900 a month.

April is National Financial Literacy Month. To mark the occasion, MarketWatch will publish a series of "Financial Fitness" articles to help readers improve their fiscal health, and offer advice on how to save, invest and spend their money wisely. Read more here.

-Brett Arends

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04-16-24 1726ET

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