Many of us don't realize that we're sacrificing retirement. Indeed, we are often unaware that some of the choices we make now can have far-reaching consequences that can put retirement at risk. Whether you are trying to create an income stream that can help you with your retirement expenses, or whether you have a target number for your nest egg, you need to watch out for behaviors that can sacrifice your long-term prosperity during your retirement years.
Raiding Your Retirement Account
One of the most obvious ways that you might be sacrificing your retirement is by raiding your fund. Tax-advantaged IRAs and 401ks sit there, beckoning, full of cash. You might tell yourself that you will replace the money, since you are only getting a loan, but many people don't actually put the money back.
If you don't put the money back, you end up paying penalties and taxes. Even if you do actually “pay yourself back,” the fact of the matter is that you have removed some of your capital from the account. You miss out on earnings that you could have had if your retirement account hadn't been missing funds for those months.
Saving Less Than You Should
Another way you might be sacrificing your retirement is by saving less than you should. Sure, it is important to enjoy yourself now. But without planning your spending, you might find that you have frittered away your tomorrow for things that you regret getting today. Do what you can to save as much as possible in retirement accounts. If you set aside $300 a month for 20 years, and earned 6% interest, the Money Chimp compound interest calculator says that you would have $141,335.96. Put $200 more in a month, you end up with $235,559.93. That's a pretty substantial difference.
Consider, too, what you could be missing out on if you aren't maxing out your tax-advantaged retirement accounts before you open a brokerage account. You will lose money to the government if you aren't fully using the savings resources available to you.
It is also possible to sacrifice your retirement when you don't think about what you could be doing to diversify your income. If you have maxed out your retirement accounts, it is possible to begin investing your money in a way that can build up other income streams. Invest in dividend paying stocks, consider investing in yourself by starting a business, or look for some other way to use your money to make more money.
Inflation: The Hidden Enemy
You might be sacrificing your retirement by not paying attention to inflation. Inflation erodes your purchasing power. $1 million in 20 years won't buy you as much as $1 million does today. Just think about what you could get with $1 even 10 years ago. You'd be hard-pressed to get that same value today. When planning for retirement, it is important to take into account the ravages of inflation.
Make sure that you factor inflation into your plans; you might end up meeting your target, but the money might not last as long since you will need more of it to meet your lifestyle requirements. Consider diversifying to include a mix of investments that can help you offset the effects of inflation.
What other ways might you be sacrificing your retirement?
Chris @cfcents.com says
As part of my day job I do audits of 401(k) plans and over the last couple of years I have noticed a significant increase in the amount of loans and in-service withdrawals. I think there is a rude awakening coming for many people.
Mr. Money says
401k loans, something I would rarely if ever suggest. :(
Chris @cfcents.com says
Loans are better than in service withdrawals. In a bear market its not the worst idea either because you can guarantee your rate of return when you pay yourself back. Not that I am suggesting that, but I had a plan administrator tell me they had several people do that.
Mr. Money says
I hear ya.. they both have their drawbacks though – not the least of which is having to pay it back right away if you lose your job.
We all spend a lot of time planning how much we need in retirement! My question is what if? So part of my plan is a contingency for all the things I can not plan for.