Seven retirement planning mistakes that could be costing you
If you’ve been saving in your workplace retirement plan, you’ve taken an important first step. But as important as saving is, you’ll also want to avoid making decisions that could greatly lower your balance at retirement. Here are a few common mistakes to look out for.
1 Missing out on compound growth
The strongest reason for getting an early start and sticking with your workplace retirement plan is the potential of compound growth. Not only do your original contributions grow, but the growth itself can earn you even more.
This effect can be quite impressive over the long term. For example, consider the first $1,000 you put in your plan. If it grows at 7% annually, compounding could nearly double your investment in 10 years—and swell it to nearly $8,000 after 30 years.
Compound long-term growth of a $1,000 balance at 7% a year
Source: John Hancock internal data. Assumes compounding once a year. Traditional IRA balances are taxed at withdrawal, while Roth accounts grow tax free.
To take advantage of compound growth, you need to put money in your plan, so use the tools your plan provider offers to set a retirement goal—and choose a contribution amount that will help you achieve it. Explore easy ways to keep your contribution amounts growing, such as setting your saving rate as a percentage of your paycheck and, if your plan offers them, signing up for automatic yearly contribution increases.
2 Not knowing the difference between pretax and Roth contributions
There are two types of contributions you can make to your workplace retirement plan—pretax and Roth. Pretax contributions come out of your paycheck before taxes are taken, and you pay taxes on those amounts and any growth when you retire. Roth contributions come out of your paycheck after taxes are taken, but (if you follow certain rules1) you’ll avoid paying taxes on your investment growth.1
It’s important to understand the difference between these two types of contributions and how they affect your retirement savings. If you expect to be in a higher tax bracket in retirement, Roth contributions are worth considering.
3 Leaving employer match money on the table
Over 60% of workplace retirement plans offer matching contributions on the money participants put in. Most of these matches range from 1% to 6% of salary and they’re available every year.2
Whether you look at this as giving yourself a raise or a free bump up in your retirement savings rate, the conclusion is the same. If your employer’s plan offers a match, try not to leave any of it on the table.
4 Not factoring in your future retirement expenses
If you have a goal for the amount you should save for retirement, chances are good it’s an income-based measurement. For years, the standard measurement shown on account statements and planning tools has been the “income replacement ratio,” which means how much of your preretirement income your savings will be able to replace.
But if you’re looking for a more accurate target, you might try basing your goal on how much you’ll need to spend in retirement. Look for tools that project your expenses throughout retirement—and your ability to meet them—based on your account data and other information you provide.
Remember how seeing that new car or phone made you even more committed to getting it? The same can happen when you take a look forward at your potential retirement lifestyle. Picture what you want to do in retirement and how much that’s likely to cost—it’s all part of the expense-based planning process.
5 Allowing plan loans to do permanent damage
In a pinch, you may have no choice but to borrow from your workplace retirement plan. But when tapping your retirement savings, be sure to treat it like any other loan—and pay it back promptly. Here’s why.
Today, money that’s out of your account is out of the running for compound growth and potential market gains. These are costs you may not have considered.
Things can get even more serious if you leave your current employer before paying back your entire loan balance. The IRS considers any unpaid balance as a withdrawal—so you could owe income taxes and a 10% tax penalty on that amount.
6 Not focusing on your financial well-being
Are other financial priorities keeping you from making progress toward your retirement goals? If so, you’re not alone.
Nearly 4 out of every 10 workplace retirement plan participants feel they’ll need to delay their retirement date because they won’t be ready financially. The percentage is even higher among those under financial stress today.
People who expect to delay retirement (%)
Those with major debt |
63% |
|---|---|
Those feeling poorly about their financial situation |
55% |
Those with student loans |
51% |
Those feeling stressed |
50% |
Many workplace retirement plans provide access to financial wellness programs, including online tools and education, so make sure you take advantage of them. From creating a budget to dealing with debt, these programs are designed to help you improve your overall finances, so you can find the cash for—and commit to—pursuing your long-term retirement goals.
7 Not seeking professional advice
Retirement saving and investing can be complicated, leading some people to procrastinate and make mistakes that can easily turn costly. But the good news is that you may be able to get professional guidance and advice right through your workplace retirement plan.
These resources can take various forms, including online planning tools and education materials, as well as presentations and webinars led by retirement counselors. For a truly personal approach, consider seeking qualified, one-on-one advice. People who work directly with a financial professional are three times more likely to say that their retirement saving is ahead of schedule.2
For best results, plan carefully
Avoiding these common retirement planning mistakes can help you make the most of your workplace retirement plan and improve your long-term financial well-being. By understanding the power of compound growth, taking advantage of your employer match, considering your future retirement expenses, and using the resources and support available to you, you can work toward achieving your retirement goals and enjoying a financially secure retirement.
Important disclosures
1 A qualified distribution from a designated Roth account in the plan is a payment made after the participant attains age 59½ (or after death or disability) and after the designated Roth account in the plan has been established for at least 5 years. In general, in applying the 5-year rule, count from January 1 of the year the first contribution was made to the designated Roth account. Participants should contact their plan consultant or financial or tax advisor for specific details on the 5-year rule and whether any special rule may apply. 2 PLANSPONSOR 2023 Defined Contribution (DC) Survey, Asset International, 2023.
2 In November 2022, John Hancock commissioned our ninth annual financial stress and well-being survey with the research firm Edelman Public Relations Worldwide Canada (Edelman). An online survey of 3,825 John Hancock plan participants was conducted between 11/29/22 and 12/14/22 to learn more about individual stress levels, their causes and effects, and strategies for relief. John Hancock and Edelman are not affiliated, and neither is responsible for the liabilities of the other.
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