Granted, it’s not your responsibility to make sure employees have a smart retirement planning strategy. But if you provide a company sponsored retirement plan, you’re the first place employees will look for guidance. And here’s a list of common mistakes that will be a healthy addition to your communication materials.
The 10 worst retirement planning mistakes employees tend to make:
1. Not eliminating debt
Car loans, personal loans, credit care bills — get rid of ’em. These quickly eat into savings.
And aside from the principal itself, it’s easy to overlook the damage the interest on these loans can do to retirement readiness.
The best plan of attack for employees is to try to enter retirement with no debt and a relatively new car that’s paid off and can last for years after they stop working.
2. Underestimating health costs and inflation
According to U.S. News and World Report, a typical 65-year-old married couple without any chronic medical conditions will need $197,000 to cover out-of-pocket health care expenses in retirement. And that number can balloon to close to $350,000 when you take into account inflation and the potential need for nursing home care.
In addition, a separate study by the Mount Sinai School of Medicine found that those on Medicare spend an average of $38,688 in out-of-pocket costs during the last five years of their lives.
Bottom line: If near-retirees think insurance will shield them from big-ticket expenses, they’re likely in for a rude awakening.
3. Saving at the default level
The most common default contribution level for a company sponsored 401k is 3%, and many employees think that’s enough. It isn’t.
The most common school of thought among financial advisors: Individuals making $50,000 or less should be saving at least 10% of their pre-tax income — and that’s if there’s a company match involved.
A more ideal retirement planning strategy would be for employees to set their contribution rate at or near 10% and try to increase it by at least 1% every year.
4. Forgetting about a previous 401k
Changing jobs can be a hectic time. In the midst of learning new skills, working with new people and possibly even moving, it’s easy for employees to forget about that 401k they left at a previous employer.
The danger in that is the investments in an old account may reach a point where they no longer meet an individual’s investment goals. Then when it comes time to withdraw, the account’s a little smaller than it could (or should) be. If management of the plan changes hands, the funds could be turned into conservative investments or cash options where they fail to keep up with inflation.
5. Bailing on stocks after a bad quarter
When it comes to investing in the stock market, which a lot of company sponsored 401ks do, it can be tempting to pull investments when the stock market appears to be on the downswing.
This can be a dangerous approach, especially for young investors who are likely robbing themselves of the opportunity to buy cheap and let those investments grow when the market rebounds.
On the other hand, older workers who aren’t as likely to be able to withstand a downturn in the market will want to think about selling high when the market is up and putting their money in something less risky than stocks — even if it doesn’t have the same growth potential.
6. Playing catch-up
Employees who don’t start saving in their twenties and thirties because they think they can make up for it later in their careers — when hopefully they’re making more money — are shooting themsleves in the foot in two ways:
- They’re robbing themselves of the potential returns they would’ve gotten on money invested earlier, and
- They’re exposing themselves to more risk by investing aggressively later in their lives.
7. Not having any insured income
If employees fail to select some type of guaranteed payout option — like an annuity — they risk running out of savings before the end of their lives.
Sure, annuities can’t guarantee employees can maintain a high standard of living, but they can at least guarantee retirees will always have some income.
8. Thinking traditional retirement savings is enough
While saving in an annuity, 401k or some other tax-advantaged plan is obviously great, employees also need to focus on establishing a healthy savings account — or some type of rainy day fund.
This will make sure a large expense — like a car or medical procedure — doesn’t wipe out the retirement savings they’ve been planning to pull from in the years ahead.
Employees don’t want to have to tap their 401k every time an unexpected expense pops up. That reduces the pool of money they’ve hopefully built a budget around.
9. Withdrawing funds too soon
As we just stated, it’s important to have some sort of rainy day fund so employees’ 401ks don’t become their go-to spot for a bailout.
Pulling money out of a 401k before age 59-and-a-half is bad on two fronts:
- The money gets taxed in the bracket they’re in now (which may be higher than the bracket they’d fall into in retirement), and
- It can get hit with a 10% early distribution penalty.
10. Collecting social security early
If possible, employees want to try to do without Social Security until their “full retirement age” — which is the age at which a person becomes eligible to receive unreduced retirement benefits. An employee’s full retirement age is dependent upon the year they were born.
If an employee elects to collect benefits before their full retirement age, their benefits will be paid out at a reduced rate for the remainder of their life.
For example, if a retiree elects to receive Social Security benefits at age 62 (the earliest allowed), and their full retirement age is 67 (which is the case for anyone born after 1960), their monthly payment is reduced by 30%. That will add up over the years.