If you recently joined your employer's retirement plan and don't feel confident about saving and investing for such an important long-term goal, don't worry. Your plan offers educational materials that can help you understand the plan's features and your investment options.
Read on to learn about five of the most common mistakes retirement plan participants make. Avoiding them can help put you on the road to a more secure retirement future.
One: Not Contributing Enough to Get the Employer Match
Some employers offer to "match" a percentage of employees' contributions to their retirement plan. For example, an employer might match 50% of the employee's plan contribution up to 6% of the employee's total annual compensation. Employees who do not contribute at least enough money to their plan accounts to get the full employer match are leaving what is essentially "free" money on the table.
Two: Taking Plan Loans
Many retirement plans allow participants to borrow from their plan accounts once they meet certain conditions. Although it can be reassuring to know that you can access your savings early if you need to, the fact that loans are available does not mean it's smart to take loans from your plan.
When you borrow money from your plan account, you'll have less invested. Until the loan is repaid, you could miss out on growth opportunities. And if you leave your current employer while you have an outstanding plan loan, you may have only a limited window of time to repay your loan balance. Otherwise, the unpaid amount will be regarded as a "deemed distribution" taxable to you.
Three: Reducing or Stopping Contributions
Your regular, uninterrupted contributions to the plan have the potential to compound over time. Investing them in an appropriate mix of stock, bond, and cash equivalent investments can help you build up your retirement savings. However, reducing the amount you contribute or stopping contributions altogether -- even for a year or two – could disrupt the possible growth of your savings.
Finding the money to set aside for retirement can be tough, especially when facing many other financial demands. But it's important to prioritize saving for your retirement. Otherwise, you might need to push back your retirement date or reduce your expectations as to what you will have available for spending in retirement.
Four: Not Understanding Your Tolerance for Risk
Risk is a fact of life for every investor. Some investments, such as stocks, carry a higher risk of principal loss than others. The risk of loss is essentially the price you have to pay for the possibility of higher returns. As a retirement plan investor, you have to figure out how much investment risk you can comfortably handle. Once you have identified your ability to handle the possibility of investing losses, you will be better able to allocate your plan investments in a way that's appropriate for your risk tolerance. *
Five: Trying to Outguess the Stock Market
Some investors believe that they can successfully time the stock market. They think they can invest their money in the market when it begins to move upward and get out of the market just as it is about to start falling. Of course, it is impossible to identify the exact moments when the stock market is about to climb or start to decline. All too often, investors sit on the sidelines when the stock market makes one of its sudden bull runs. As a result, the long-term growth of their retirement savings is negatively impacted.
The reality is that time in the market works for retirement plan investors, not timing. By steadily investing in your retirement plan every payday, you are building up your account balance. Moreover, you can also benefit from compounding. The longer your money is invested, the greater potential benefit there is from compounding.
For assistance in reviewing your retirement plan portfolio and investing strategy, consult a financial professional.
Remember that you may contact Popular’s Retirement Center at educacionretiro@popular.com. If you have a 401k plan with Popular, remember that you can count on our group of experts at TeleBanco Popular® to guide you on matters related to your retirement plan. Call us at 787-724-3657 (press option 2 three times).
Source/Legal Disclosures:
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Asset allocation does not guarantee a profit or protect against losses.
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The information and general descriptions found in this article are designed to help you understand some of the factors you should generally consider when evaluating the appropriateness of any strategy or investment within your retirement plan. Any description included is for informational and educational purposes and for your independent consideration only; it should not be regarded or viewed as advice or as a recommendation to take (or refrain from taking) any particular action. By providing this information, we assume that you can evaluate this information and the general descriptions found here to exercise your independent judgment. Banco Popular de Puerto Rico, its subsidiaries and/or affiliates are not engaged in rendering legal, accounting or tax advice services. If legal, accounting, or tax advice services are required, you should seek the services of a competent professional. Investment products are not insured by the FDIC, they are not deposits or obligations of, nor are they guaranteed by Banco Popular de Puerto Rico, its affiliates and / or subsidiaries; involve risks, may lose value, including the possible loss of the principal invested.
