8 Mistakes Related to Retirement Accounts

By C.J. Neff on March 28, 2023

Let’s talk about 8 ways you can shoot yourself in the foot financially. And in this post, we’ll focus on retirement accounts. Obviously, everyone’s situation is different, and thus these rules of thumb may or may not apply in your particular situation, but generally speaking the following 8 mistakes are best avoided.

Mistake #1 – Not using retirement accounts

There’s a special name the IRS uses to refer to retirement accounts. They’re called “qualified accounts”.

What do they “qualify for”, you ask?

They qualify for special tax treatment. Generally, you’ll pay less in taxes by using retirement accounts.

I’ll tell you one thing, I’ve never had a client ask how they could pay more in taxes, so I encourage clients to take advantage of every possible tax break, and retirement accounts are one of the most ubiquitous tax breaks.

Mistake #2 – Missing out on a 401(k) match at work

If your employer offers a 401(k) or similar plan type at work (like a 403(b)), it’s likely that they offer some sort of matching contribution.

If you put money in, they’ll match it, or partially match it. You’ve probably heard this referred to as “free money”.

If your budget allows (and you should do everything in your power to make sure it allows), I would encourage you to contribute at least enough into your 401(k) to earn the maximum company match.

Mistake #3 – Thinking the match percentage on your 401(k) is the maximum you can contribute

When I hear a client mention 3 or 4% being the maximum they can contribute to their 401(k), I often suspect they’ve convoluted the maximum percentage their employer will match with the maximum amount they – as the employee – can contribute.

There’s a fixed limit that the IRS sets annually for how much an employee can contribute to a 401(k) – it’s not a percentage of your income.

In 2023, if you’re under 50 and you contributed less than $22,500 to your 401(k), you’re not maxing it out. If you’re 50 or over, your limit is $30,000 annually as of 2023.

Think about what you can do in your budget in order to max out your retirement account at work.

Mistake #4 – Not investing cash inside your retirement accounts

Most people don’t learn this stuff in school, but it’s important to understand that an IRA or a 401(k) are simply buckets you can put money into. Just because you’ve put money in one of these buckets does not mean it’s invested.

If you want the potential for your retirement accounts to grow over time, you can’t just put money into the accounts, you’ve got to invest the money inside your retirement accounts.

Mistake #5 – Thinking a 401(k) is the most powerful and tax efficient retirement savings vehicle

I like to say that there are three sizes of retirement accounts.

IRA’s allow the smallest annual contributions.

401(k)’s and similar types of accounts allow medium-sized contributions, but many people think these are the most powerful retirement savings accounts.

If you’re a business owner and you meet the qualification criteria, you may be able to use an even more powerful retirement vehicle – a defined benefit plan. These aren’t for everyone, but in niche circumstances, this is an extraordinarily powerful technique.

Mistake #6 – Forgetting to rebalance

Rebalancing client portfolios is a common technique for financial advisors. It helps normalize the volatility inside a portfolio – which is just a fancy way of saying that it can help smooth out the ride and reduce the risk of panic selling.

There’s a catch, though. Many retirement accounts are self-managed, thus there’s no financial advisor there to remind you to rebalance or rebalance for you.

Mistake #7 – Forgetting about retirement accounts

I really hesitated on whether to include this one, but I’ll tell you a secret – this actually happened to me.

I was at my parents’ house years ago, and I spontaneously remembered about a 401(k) with my first employer. I had forgotten about it for years! While discovering that I was $50,000 richer than I thought was was a wonderful surprise, I’ll tell you what, most people I know with money know exactly how much they make, how much they spend, and how much they have.

Forgetting about accounts is sloppy and dangerous. If it’s easier for you, you might consider consolidating old 401(k)’s. The more accounts you have, the more difficult it can be to manage, and in my experience, the higher the danger of truly forgetting about money you’ve rightfully earned.

Mistake #8 – Not saving enough for retirement.

There are a lot of factors that go into answering the question of whether you’re saving enough for retirement, so it would be impossible for us to give a recommendation that works for everyone.

That said, I do think it’s helpful to understand roughly where the guideposts are. A lot of assumptions have gone into the following numbers – for example that you’re starting with no current retirement savings and that your expenses in retirement will be similar to what you’re spending now.

• Everyone’s circumstances are different, but rough numbers suggest that if you’ve got 40 years until retirement you should be saving 18% of what you make.
• If you’ve got 30 years until retirement, you should be saving 28% of what you make.
• If you’ve got 20 years until retirement, you should be saving 44% of what you make.
• And if you’ve only got 10 years until retirement, you should be saving a whopping 2/3rds of what you make.

Most people aren’t saving anywhere near these rates!