Two Common Retirement Investing Mistakes

April 20, 2016

fb-retirementmistakesAre you making the most of your IRA?

Individual retirement accounts are a common way to invest for retirement, but many investors are making two surprisingly common mistakes that can really hurt their ability to fund a comfortable life in retirement.

Mistake #1:  Forgetting to contribute to your IRA

Nearly all working people need to make regular contributions to a retirement account in order to accumulate enough money to live on in retirement. But many people don’t contribute to IRAs.

“Although IRAs can help Americans build their retirement savings, the majority of U.S. households do not contribute to them,” the ICI reported in February 2016.

Here’s what to do:

Some investors simply aren’t eligible to contribute, so your first step should be to check the IRS Web site to make sure you can contribute.

Then, if you can contribute, decide how often you’ll add to your IRA–will you make one annual deposit or will you contribute a little every month?

The next step is to schedule a reminder so you’ll stay on track. If you’re making one deposit a year, put it on your calendar or schedule an alert on your phone so you’ll remember to make your contribution every year. If you’re making monthly contributions, consider setting up an automatic transfer from your checking account into your retirement account.

Write down how you plan to contribute to your retirement account to make sure you’ll follow through. Studies find that investors who have a written plan are much more confident that they can reach their goals.

Even relatively modest contributions add up over time, especially if you invest your contributions.

Mistake #2: Leaving your IRA contributions in cash

Many people make their IRA contributions early in the year when they’re doing their taxes, but then they forget to invest their contributions. A  Vanguard study found that more than two-thirds of IRA contributions made in January through April was still in cash four months later.

The market goes up more often than it goes down, so even though we can’t know if we’ll be better off this year to invest our money earlier rather than later, on average we are better off getting our long-term money invested sooner than later. The sooner we invest our IRA contributions, the more time our investments will have to grow. So if you made a contribution to your IRA this year, do yourself a favor and get it invested.

Here’s what to do:

Vanguard found that while investors “know they need to make the contribution, they haven’t necessarily made their investment choice,” and that’s understandable. With more than 25,000 funds and ETFs available, it can be challenging to know which funds to own now and when to move into other funds.

But a clear investment approach like our Upgrading strategy can help you get invested now and adapt as markets change.

This post by FundX President Janet Brown originally appeared on Forbes.


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