Don't Make These Retirement Savings Mistakes

By Alicia Rose Hudnett Markets Fool.com

Saving for the long term remains a persistent challenge for many Americans. Whether they can't afford to set aside money for retirement or they're simply not making it a priority, too many Americans have little to nothing saved for their golden years.

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There will come a time when, either by choice or by circumstances out of your control, you will stop working and earning a monthly income. And your personal retirement savings will be the only thing standing between maintaining your standard of living or possibly living in poverty. Here are a few costly missteps you'll want to avoid.

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Paying others first

You will always have competing financial priorities. Every payday presents a savings opportunity, and if you are not paying yourself every time you get a paycheck, you're doing a major disservice to your future self.

The fix: Treat your retirement account as another bill-collector -- not a discretionary item that may or may not get paid each month. Save every last penny; even if you can only afford to set aside $100 per month, that will make a meaningful difference in your nest egg over the course of years.

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Saving for retirement in a savings account

Retirement accounts offer immediate, ongoing, and future tax benefits. They also allow you to invest your money in high-growth investments like stocks, which can multiply your savings many times over. Ordinary savings accounts offer neither of those advantages.

The fix: If you have access to a workplace retirement plan, speak to the person in charge of payroll and have a portion of your income deposited directly into the account. Otherwise, visit a discount brokerage online, open an individual retirement account, and start contributing to it regularly.

Using your retirement account as a savings account

In general, if you withdraw money from your retirement account before the age of 59 1/2, you will owe ordinary income taxes on the money and may be subject to a 10% early-withdrawal penalty -- unless you meet one of the exceptions to the tax penalty or have a Roth IRA, which allows you to withdraw your principal (but not any earnings) at any time free of tax. But even more detrimental to the account is the loss of investment time -- the time that your money would have spent growing and compounding.

If you've been putting money into an IRA to save for anything other than retirement, then you're missing the point. The only way to prepare for retirement is to pre-fund it. Once you're in retirement, there are no do-overs. Retirement accounts should be earmarked exclusively for your post-work life, not for big-ticket items you want to buy now.

The fix:Use a savings account for purchases you'll need to make before retirement, and leave your retirement savings untouched until you actually leave the workforce for good. And if you're saving to pay for your children's college education, look into funding another tax-advantaged account: a529 education savings account.

Staying out of the stock market when it gets choppy

I'm sure you've heard the line about how you can't time the market, and yet that's exactly what millions of investors attempt to do when they stop contributing to their retirement accounts during steep market downturns. These shortsighted investors often spend years out of the market and miss out on the ensuing rebound.

Meanwhile, remember the upside of market crashes: Your money is buying more shares at lower prices. For example, during the 2008 financial crisis, the Dow Jones Industrial Average fell by about 50%. If you had paused your retirement savings and stayed out of the market, you would have missed the years-long run-up to the current level of 21,000. And even if you had started up your contributions at some point over the last few years, you may have missed out on some of the best buying opportunities of your lifetime.

The fix: Write down your investment plan. If you're uncomfortable with your investments when the economy isn't doing well, you may need to revisit your risk tolerance and asset allocation. The stock market can't always be climbing, so you need an investment strategy that you can stick with through good times and bad.

And just as you know the stock market probably can't stay positive forever, it probably won't decline forever, either. So if you have decades to go before you need your retirement money, you'll likely go through various economic cycles -- and you have time to recover from losses and continue adding to your savings to make up for those losses.

Saving up enough money to last you through a 20- or 30-year retirement takes serious planning and discipline. Don't make it even harder on yourself by making unforced errors like failing to save, raiding your retirement accounts early, or bailing when your investments take a dip. Keep a level head and stick to a well-defined plan, and you'll stand a much higher chance of retiring in comfort.

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