As we’ve discussed in previous issues of Money Watch, millions of Americans are not saving the right amount forretirement—most people just aren’t saving enough. But what about those who think they are saving what they should, but find out as retirement approaches that they’ve made poor investment decisions? Recent studies have shown that many people are doing exactly that.
Common investment errors can cost you hundreds of thousands of dollars if you aren’t aware of them and keep making the same mistakes year after year throughout your career. Take a look at this checklist and ask yourself the following questions. If you find yourself answering “yes” to any of the questions, you may be making big blunders whereit comes to investing and it is time to reassess your retirement savings strategy.
Are you loading up on your own employer’s stock?
Twenty percent of investors have half or more of their balance in their employers stock. Most often, this is the case because people feel they know their company and therefore this option seems less risky. However, a single stock is typically many times as risky as a diversified portfolio. Cases like Enron would go to prove that putting too much stock in your company (or any one investment option for that matter) comes with a high risk. If you own any employer stock in your 401(k) – think about selling it or at least limiting it to a small percentage of your portfolio.
Are you being too conservative?
Don’t put too much of your money into low risk choices like stable value, bond and money funds. Of course, these offer some protection from market setbacks, but they lack the growth potential you need to end up with adequate income at retirement. Instead, create a blend of stocks and bonds that allows for sufficient gains, but also provides some cushion from drops in the market. You’ll need a sizeable nest egg, and conservative choices with little risk will not pay off.
Are you dividing your money evenly like a pie?
Some people think diversifying means putting equal amounts into all the options. However, that approach will not balance your portfolio adequately. Depending on your plan’s options, you could end up with too many bonds or other investments that won’t help you achieve your goals. Go to www.morningstar.com and plug in your choices to see how your portfolio breaks down the asset classes—large and small stocks, bonds and foreign shares. Next, you will want to compare your current mix to the one the Asset Allocator suggests. This will give you an idea of whether you should rebalance your 401(k).
Navigating retirement savings can be a complicated task and there are many forces that can get you off track —not saving enough for retirement, or simply making bad choices where it comes to investing. Avoiding the common errors above won’t guarantee that you will have a giant nest egg, but it will help make sure you are making the most of everything you are putting aside for retirement.