by Mike Loch, GSAM Wealth Advisor & Chief Compliance Officer
September 26, 2024
Self-Directed Retirement Plans such as a 401(k) or a 403(b) have been one of the most effective and widely used investment tools available to individual investors. However, even the most seasoned investors commit pitfalls that diminish their returns or delay their retirement goals. Here are some of the most common mistakes investors make and how you can avoid them:
1. Not Contributing Enough to Get the Employer Match
A frequent mistake we see is not taking full advantage of the employer match. Many employers offer a match up to a certain percentage of your salary—essentially free money for your retirement. Failing to contribute enough to get the full match is leaving money on the table.
Takeaway: Always contribute at least enough to get the full employer match. It is an immediate return on your investment.
2. Starting Too Late
The earlier you start investing in your retirement plan, the more time your money has to grow. Waiting too long to begin contributing can significantly reduce the amount of money available to you in retirement due to the loss of compounding growth over time.
Takeaway: Make compound returns work for you by contributing to your plan as soon as you are eligible, even if it’s a small amount. Over time, you can increase your contributions as your income grows.
3. Ignoring the Importance of Diversification
Some investors either play it too safe or too aggressive, putting all their money in either bonds or stocks, or even worse, in a single stock—often their employer’s. While it can be tempting to go all in on what is performing well at the moment or to overweight your employer’s stock, lack of diversification increases risk and can lead to significant losses.
Takeaway: Diversify your retirement account across different asset classes, including stocks, bonds, and international investments. While your retirement account may have a long-term time horizon, always keep your risk tolerance in mind.
4. Taking Early Withdrawals
Withdrawing from your retirement plan before age 59½ usually comes with hefty penalties and taxes. While it may be tempting during financial hardship, it can severely impact your retirement savings.
Takeaway: Explore other options like loans or hardship withdrawals (if necessary) instead of outright withdrawals. Understand the tax implications and long-term impact of reducing your retirement savings.
5. Failing to Rebalance Your Portfolio
Market conditions change, and so does the allocation of your portfolio. If you do not rebalance regularly, your portfolio may become too risky or too conservative for your retirement goals.
Takeaway: While some plans offer the ability to have a set schedule for rebalancing, it is better to schedule a time to review your portfolio at least annually and rebalance if needed.
6. Not Increasing Contributions Over Time
As your salary increases or as you begin to have more disposable income, your plan contributions should increase too. Many people make the mistake of sticking with their initial contribution rate as their income grows, missing out on the benefits of compound growth.
Takeaway: Whenever you receive a raise, increase your contribution rate by a set percentage of that increase.
7. Overlooking Roth Options
Some employers offer Roth 401(k) or 403(b) options, which allow you to contribute after-tax dollars, grow tax-free and withdraw tax-free in retirement. Many investors stick with the traditional 401(k) or 403(b) because they are unaware of the Roth option's benefits.
Takeaway: Assess your current and future tax situation to determine if a Roth option makes sense for you. Younger investors or those expecting to be in a higher tax bracket in retirement may benefit significantly from using a Roth option.
8. Ignoring the Importance of Catch-Up Contributions
Once you reach age 50, you’re allowed to make additional "catch-up" contributions to your retirement plan and individual retirement account (IRA). These extra contributions can significantly boost your retirement savings, but many people overlook this opportunity.
Takeaway: Take advantage of catch-up contributions if you’re 50 or older. This can be especially important if you started saving later in life or if your current savings are not where they need to be.
Avoiding these common mistakes can help ensure that your retirement savings grow steadily over time, setting you up for a comfortable and secure future. By staying informed and proactive about your contributions and investments, you’ll be better positioned to achieve your long-term financial goals. Remember, it’s never too early—or too late—to start making smart decisions about your retirement.
If you’d like to learn how to be proactive in securing your retirement through informed investment choices, please reach out to our team: 412-257-8060 or advisors@gsaminc.com.
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