As humans, we sometimes have a hard time looking to the future and preparing for what could happen. The result is that, all too often, the things we do now negatively impact the future. This is true of financial decisions as well as other choices we make.
For many of us, a comfortable retirement is the financial end goal. However, the things you do right now might be keeping you from that goal. Here are 5 financial decisions that could be undermining your retirement future:
1. Putting Others First
Our society puts value on selflessness, but it’s not always a good thing — at least when it comes to your retirement. If you are putting money into your child’s education savings account instead of your own retirement account, you might be setting yourself up for failure. Figure out your retirement needs and make sure you are meeting those before you contribute to your child’s education, or before you get too carried away with charitable contributions. You will have a better capacity to be generous your whole life if you get your own finances in order first. You can’t help others if you’ve backed yourself into a financial corner; instead, you wind up a burden on your loved ones.
2. Borrowing from Your Retirement Account
Sometimes, it’s tempting to take money out of your retirement account. You might feel like there’s an emergency, or you just might want the cash. This can undermine your retirement efforts if you aren’t careful. Even if you repay the money you took from your account, you can’t replace the time that the capital could have been earning interest. Don’t underestimate the cost of lost earning opportunities. Try to avoid borrowing from your retirement account if at all possible.
3. Paying High Fees
The fees you pay can cost you as much as $150,000 or more over a lifetime — at least that’s the number in the United States for those who overpay on their 401(k)s. However, the same rule can be applied no matter where you live. If you pay high fees for retirement account management, you will be losing out.
Other high fees might include high brokerage fees, and the fees you pay for frequent trading. Look over the fees you are paying related to your retirement savings, and you might be surprised at how much you are missing out on — and how much it might be impacting your long-term retirement prospects.
4. Being Too Risk Averse
None of us likes the idea of losing money. However, it is possible to be too risk averse when you are planning for retirement. Recent stock market crashes have scared investors, but the reality is that, over decades, stocks have yet to lose. Historically, stocks, especially if you rely on index funds, are the best way to build long-term wealth without taking on unreasonable risk.
If you keep all of your money in “safe” low-yield assets like bonds, GICs, and cash, you probably won’t build up a nest egg capable of resulting in a comfortable retirement. In fact, inflation may erode your real returns to a point where the risk is that you actually lose out.
Take a look at your asset allocation, and your risk tolerance, and determine if you are being too risk averse. It might be time to add a few more low-cost stock funds to your portfolio.
5. Not Taking Advantage of Tax Benefits
More on Retirement
The government offers you the chance to save for the future with the help of accounts that grow tax-deferred and tax-free. Whenever possible, take advantage of these accounts. Your money grows more efficiently over time, since you are receiving a benefit. RRSPs and TFSAs (and IRAs, 401(k)s, and their Roth versions in the United States) are great places to start. Take a look at your options, and use these accounts as much as you can.
You might be surprised at how taxes can erode your long-term wealth, and cause problems with your retirement. Use tax-advantaged retirement accounts to boost the efficiency of your savings.
Look ahead to your retirement. Make a plan, and invest for retirement. The more you save now, the better off you’ll be later. Don’t sacrifice your retirement future.
Miranda is freelance journalist. She specializes in topics related to money, especially personal finance, small business, and investing. You can read more of my writing at Planting Money Seeds.