Do you want to preserve your wealth? Of course you do! But are you aware that there are specific behaviors that could cause you to lose your retirement savings? Even if you are diligently saving your money, you could run into retirement trouble if you find yourself doing any of the following:
1. Ignoring Your Long-Term Strategy
Have you ever taken the time to create an investment philosophy based on your goals, personality, and risk level? If you have, do you stay true to your strategy or do you let your emotions take over when the markets go wild? The reality is that markets fluctuate every day. If you try to beat the market and get swayed by the headlines, not only will you cause yourself unnecessary stress, but acting on your emotions could cause damage to your savings.
A 2015 Dalbar study shows how playing the market leads to underperformance. Buying high and selling low due to panic lowers your overall return and may jeopardize your retirement. What should you focus on instead? Maintaining a long-term perspective and a disciplined approach and refusing to ride the market roller coaster.
2. Borrowing From Your Retirement Savings
This is more common than you might think. The Transamerica Center For Retirement Studies tells us that 23% of people surveyed dipped into their retirement plan to pay for an unexpected expense. This behavior can result in a retirement savings loss in two ways.
First, if you take a 401(k) loan, you are subject to double taxation on the interest. While any money borrowed is tax-exempt, the loan is repaid with after-tax funds. When you withdraw your funds in retirement, you are taxed again. Also, if you leave your job or are fired, you must pay back the loan in 60 days, regardless of the amount. If you don’t, you are subjected to income tax and a 10% penalty if you are under 59½.
Except for certain circumstances, early contribution withdrawals from a traditional IRA will result in a 10% penalty and taxes. Roth IRAs have more flexibility and allow you to withdraw contributions without penalty, but not without long-term consequences.
Second, when you draw from your retirement savings to cover a debt or expense, you lose out on the growth potential and compound interest. Depending on how old you are, you may never be able to rebuild your savings. It may seem convenient to use your retirement savings in this way, but you are robbing your future retirement to do so. Instead, create an emergency savings account and tell yourself that your nest egg is off limits.
3. Failing to Take Required Minimum Distributions
If you are 70½, you must begin taking required minimum distributions (RMDs) from your traditional IRA and employer-sponsored retirement accounts. It doesn’t matter if you need the money when you reach this age, you must still adhere to the RMD rules. What happens if you don’t follow through? The IRS will charge you an excess accumulation penalty of 50%! That can significantly harm your retirement savings amount. As an example, if you are required to withdraw $5,000 and don’t, you will owe a whopping $2,500. That’s an unnecessary and avoidable loss. Depending on how much you have in an emergency fund, you may even be forced to use your retirement savings to pay the penalty, further damaging your future financials.
4. Putting All Your Eggs In One Basket
Diversification is one of the most talked about investment strategies for a reason. It protects your investments from market volatility. While you can’t eliminate risk from your portfolio entirely, you can cushion the blow if things go south. If you put too much of your money into one stock or even one sector of the economy, you are putting yourself in danger of losing your retirement savings. Mix it up with global exposure, alternative investments, and a portfolio that isn’t too stock heavy. Look at the big picture of all your accounts, including employer-sponsored ones, and ensure you are diversified across the board.
5. Working Alone
When you don’t partner with a trusted financial professional, you put your money in a dangerous spot. An advisor can help you stick to a long-term strategy, keep emotions at bay, and provide you with guidance and advice that you can’t put a price on. Let me help you preserve your wealth so you can retire on time and with peace of mind. Take our retirement readiness quiz and contact me at 770.249.7424 or email me today at [email protected] and take the first step in protecting your retirement savings.
Previously published on richlifeadvisors
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