These three mistakes could cost you thousands in retirement savings

Here's some helpful advice on saving for retirement.

Melanie Stetson Freeman
An investment advisor helps a client add funds to her IRA. Wise financial planning for retirement can make a huge difference.

When it comes to retirement planning, the more you save, the better. But aside from saving more, you also need to invest wisely. Many people diligently put money into a 401(k) but do not realize that the money they save could have grown to a much larger amount. Here are three common mistakes that investors make when planning for their retirement:

Not considering the Roth option

Most qualified retirement plans are tax deferred. This can help lower tax bills and allow investors to put their pre-tax earnings into investments. This way, their invested money will be allowed to grow for years without interruption.

What most people don’t consider is the Roth option, which is available for many different accounts, including Roth IRAs and Roth Solo 401(k)s. Taxes are paid up front on the contributed amount to a Roth account. Although this means a higher tax bill at first, it may offer a better deal in certain cases. With a Roth account, plan holders will not have to pay taxes upon withdrawal, not even for the earnings and profits from investments.

Also, there is no early-withdrawal tax on the contributed amount. Therefore, although it’s not recommended, plan holders can withdraw the contributed amount to a Roth account in case of emergency without any tax charges. Depending on the tax rate, this could amount to thousands of dollars in savings.

Accepting low rates of return

The main goal of having a retirement fund is to provide financing for the plan owners for an unknown period of time. To make sure the fund lasts as long as the plan owners, the fund needs to earn more than the amount the plan owners plan to withdraw every year during retirement. When it comes to retirement planning, investing is just as important as saving.

Unfortunately, most people ignore the investing aspect of their retirement planning. Many stash away money into their 401(k) to take advantage of their employer-matching contribution. In many cases, however, this money is left to earn little to nothing. Plan owners could miss out on thousands of dollars in investment earnings.

This is why plan owners are encouraged to study their investment options. Aside from the low-risk and low-return target date funds, retirement plans can also invest in index funds with a higher return. Many investors also roll over their funds into self-directed plans, such as the Solo 401(k) or Checkbook IRA. With a self-directed Solo 401(k) or IRA, the investment options will also include non-traditional assets, such as real estate, private businesses and precious metals.

By reviewing and considering different investment options, plan owners can find ones that fit their risk appetite and earning requirement. Because of the compounding effect, a 1% or 2% increase in earnings now can accumulate to a substantial difference in the future.

Paying expensive fees and charges

If an investor rarely looks at his investment portfolio, he is even more unlikely to study the fee structures of his retirement account. The problem is that because most people don’t read the fine print they never know how much their custodians or fund managers are making from their accounts. According to Demos, the average American couple lose about $154,794 over their career to 401(k) fees and lost returns.

To save on costs and fees, plan holders should do their due diligence. Understand the fee structures, including all the transaction-based and value-based costs and fees. Shop around for the best-value service providers. If possible, consider a self-directed plan, such as the Solo 401(k) or Checkbook IRA, to minimize the charges related to custodial responsibilities.

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