If you're consistently saving a double-digit percentage of your income for retirement, then congratulations. You've taken a huge step toward ensuring that you'll have a comfortable retirement. However, it's only the first step; the next is to grow your money so it will be enough to support you when you're no longer working. If you're making any of these common errors, then you may come up short despite your diligent saving. Please know that these are only generally examples of some common potential errors and these examples do not apply to everyone.
Having too much risk
Of course, you can have too much of a good thing, and having assets that are exposed to more risk is no exception. Splitting your money between stocks and other investment types can help mitigate your losses when the stock market takes a dive.
Bonds may be helpful in some scenarios, because they tend to move inversely to stocks: When the stock market goes down, bonds generally gain value, and vice versa. Also, other assets, such as annuities, can sometimes help mitigate risk. It is important to evaluate the risk of your assets so not matter what the economy is doing, some part of your retirement savings can be gaining value.
Not using an IRA or 401(k)
You could just stick your retirement savings into a regular brokerage account and invest it there. But if you did that, you'd miss out on the enormous tax advantages that come with qualified retirement plans, such as an IRA or 401(k). All flavors of qualified retirement plan vehicles allow you to receive dividends (from your stocks) and interest (from your bonds) without having to pay taxes on that money as it comes in. You're also free from paying capital gains taxes on any sales made within these accounts. Tax-deferred retirement savings vehicles, like the traditional IRA and 401(k), also give you a tax break on the money you contribute to those accounts. With 401(k)s, your contributions are made with your pre-tax wages, and with IRAs, you may be able to deduct your contributions from your taxable income when filing your tax return. You'll have to pay taxes on the money you withdraw from those accounts during retirement, but by then the money you contributed will have had years to grow tax-free. Roth IRAs and 401(k)s basically give you the opposite tax advantage: You pay taxes on money you put into these accounts, but you don't have to pay taxes on qualifying withdrawals. Please keep in mind that you likely won’t be able to access qualified retirement plan funds without penalty until after the age of 59 ½.
Not considering the tax treatment of your assets
Qualified retirement accounts aren't the only way to get a tax advantage on your retirement savings. Certain types of assets are exempt from state taxes, federal taxes, or both. For example, Treasury bonds are subject to federal taxes but exempt from state taxes; municipal bonds are exempt from federal taxes and may be exempt from state taxes if you live in the state that issued the bonds. Because of the tax advantages that these assets offer, they also tend to pay a slightly lower rate of return than similar assets that don't enjoy such tax breaks. This may still work out to be a good deal for some, especially if you’re currently in a high tax bracket. However, such assets don't typically belong in a qualified retirement account; anything you put in such an account gets tax breaks, so if you put something like municipal bonds in your IRA, you'll get the lower rate of return without actually getting any special tax advantage in return. If you're able to reach the annual contribution limits on your qualified retirement accounts, then you should likely fill them with taxable investments and put tax-exempt assets in a standard brokerage account.
On the other hand, investments that tend to be subject to high taxes should likely be held in a qualified retirement account, not a standard brokerage account. For example, REITs tend to pay high dividends, so if you keep REITs in your standard brokerage account, you'll likely incur hefty dividend taxes. Keeping REITs and other dividend-paying assets in your IRA or 401(k) to keep that from happening can be beneficial in some instances. Picking the right retirement assets to maximize returns and minimize taxes and other expenses can get complicated. Even experienced investors may want to get the opinion of a qualified financial services professional. A single meeting with a qualified financial services professional to go over your retirement and make any necessary corrections can be beneficial.