401k Mistakes: Top Mistakes Baby Boomers Make
Every year, more baby boomers reach retirement age. If you haven’t begun seriously planning for your own future yet, it’s important to start as soon as possible. But even if you are building up your savings, you might not be doing it as wisely as you could. Here are some of the top mistakes that baby boomers make with their IRA or 401(k) plans.
Failing to Withdraw the Required Minimum Distribution
Once you reach retirement age, the IRS requires you to withdraw a certain minimum amount from your IRA. This is called the Required Minimum Distribution (RMD). Unfortunately, many people fail to take out that money, fearing that it will deplete their savings.
However, not doing this actually puts you in more financial jeopardy. If you don’t withdraw the annual RMD, you could be charged penalties of up to 50%, which curtails your IRA’s growth and ends up depleting it more quickly than if you had simply taken the money.
Borrowing from Your 401(k)
Your 401(k) is there to provide for your retirement. But what if you run into financial troubles before that? It can be tempting, if a large emergency expense comes along, to dip into your savings in order to cover it. But this is a bad idea.
Even if you do pay the money back in full before you reach retirement age (which is difficult), you’ll also have to pay penalty fees for early withdrawal. Plus, taking out a lump sum, instead of incremental payments, diminishes the additional interest you’ll earn on your savings. If you need extra cash, find another source besides your 401(k).
Putting Your Money in a Trust
Rather than borrowing against your retirement fund, you might decide on the opposite course of action: putting the money into a trust for later use. Unfortunately, this carries with it a lot of the same problems as raiding your 401(k) early. First, you’ll be charged taxation fees. And if you take out the money before the age of 59.5, you’ll accrue an additional penalty of 10%. Leave your money alone to grow on its own, and don’t touch it until you’re ready for it.
Investing in Company Stocks
This is more of a risky move than a cut and dried mistake. Stock investments have the potential to produce huge payouts. However, if you’re not careful, you can also lose a large chunk of your savings. You never know how a company you’ve put money into will perform over time. If one such business has a bad year, or even goes under, you can be left with next to nothing. Experts advise putting no more than 10% of your IRA into company stocks.
Even more dangerous is putting all your money – and faith – in your employer’s stock. As poorer-but-wiser ex-employees of Enron and current employees of Wells Fargo can tell you, just because you work for a company it’s no guarantee they’re being honest with you about what’s driving the stock price, and where the business is headed. As in every area of finance, it’s a horrible idea to put all your eggs in any one basket.
Not Diversifying Your Portfolio
This goes hand in hand with the above point. Many people have a “favorite” type of investment, which they think will bring the biggest return, or the safest payout. Often, the temptation is to put all or most of your money into that particular venture in the hope of maximizing your IRA or 401(k).
However, no investment is without its risks. If an unexpected disaster occurs, you could be left with nothing. This is what happened in 2008. The stock market crashed, and IRAs and 401(k)s were decimated overnight.
Even bonds, once considered among the safest investments of all, are a risk these days. Returns are diminishing, while incremental inflation rises, causing people to lose money.
Thus, the smart thing is to spread your investments out across multiple outlets. That way even if trouble arises with one, you’re only out a relatively small amount of money, and you still have the rest to fall back on.
These are just a few of the mistakes that baby boomers can make as they try to plan for their retirement. But you don’t have to fall into these traps. Do your research, stay informed, and make sure that, when you do ultimately leave the workforce, you’ve set up your IRA and/or 401(k) to provide the maximum benefit to you with the minimum hassle.