Avoiding investing potholes

Few investors, if any, sail through life without making any mistakes, but when it comes to retirement investing, serious missteps can cost you. For instance, unadvertised fees are easy to discount, but investors do so at their peril. Paying an extra 1% in fees every year over the span of a career can leave your account lighter by tens of thousands of dollars at retirement, according to the Department of Labor.

Similarly, ignoring unseen sources of risk can also prove detrimental. Since the market crash in 2008, many investors have been wary of taking aggressive risks with their portfolio for fear of losing money. But investing too conservatively can pose even more risk in the long run.

Unfortunately, workers are largely on their own when it comes to funding their retirement, and that necessitates learning everything possible about the best way to get there -- especially how to avoid the biggest retirement investing mistakes.

Not taking full advantage of tax breaks

It's somewhat counterintuitive, but a person's actual investments can be less important than the types of accounts used for investing for retirement. The tax-favorable 401(k) plans and individual retirement accounts, or IRAs, are a huge leg up in getting to retirement because they enable your tax-deferred earnings to compound. In addition, with traditional plans you generally get an immediate tax break on your taxable income each year you contribute.

At any point in time, less than one-half of the full-time, private-sector workforce has access to a workplace retirement plan, says Anthony Webb, a senior research economist at the Center for Retirement Research at Boston College. Of that group, about 20% choose not to enroll in their workplace plans, he adds.

It's especially foolhardy to pass up the opportunity to invest in a plan when your employer matches a portion of your contributions. That's because you're passing up free money -- the equivalent of refusing a salary increase when it's offered.

Not saving enough -- or at all

Once you sign up, figuring out the best amount to contribute is the next hurdle. Not surprisingly, most people don't contribute enough.

According to Webb, the average contribution rate is 6%. Combined with a typical 50% match from the employer, the average employee saves 9% of salary annually.

"If the employee started (saving) at age 22 and contributed every year to age 66, that might possibly be enough. But if you add in gaps, late starters or all the rest to it, then the calculations that we have done at the center show that 9% is really, really not enough," says Webb.

If 9% is not enough, zero is much worse. A recent survey by financial services organization TIAA-CREF found that 80% of those asked were not contributing to an IRA and nearly half, 43%, could not even identify an IRA correctly.

Reasons abound why investors arrive at retirement with less than an optimal amount. One person may have endured a massive, uninsured health problem; someone else may have experienced a prolonged period of unemployment. Many people simply just do not save enough.

Whatever the reason, those who come up short may find they need to work longer and save harder than someone who started saving in their early 20s.

High fees in retirement plans and investments

Until recently, participants in employer-sponsored plans, such as 401(k)s, had no way of knowing exactly how much their plan cost, and the vast majority had no idea that their plans had any costs at all. From the expenses charged by mutual funds to record-keeping costs, fees add up. That translates to fewer dollars available for compounding and a lot less money at retirement.

Plan fees can run as high as 4%, but "an acceptable level is around 1.5% for everything," says Craig Morningstar, chief operating officer at Dynamic Wealth Advisors in Scottsdale, Ariz. That includes the mutual fund fee known as the expense ratio.

"Employees have to take an active interest in what their company is offering. When there are enough inquiries, employers will look to see what they have," Morningstar says. In other words, the squeaky wheel gets the grease.

If plan fees are unreasonably high, participants should also ask if the plan is working with a professional plan fiduciary -- a named fiduciary can save a plan enough money to more than make up for their expense.

Workers can most easily control mutual fund costs by making smart investment choices. Since high fees can negate any outperformance above benchmarks, low-cost index funds are generally the best bet.

Focusing on only one risk

Except perhaps for extremely frugal savers who get paid handsomely and maximize their contributions, most people need to get substantial returns on their portfolio to arrive at retirement with a decent-sized pot of money. That means investing in stocks is prudent for most.

A recent survey by mutual fund company Franklin Templeton found that more than a third of long-term investors, 37%, believe they can get by without investing in stocks at all.

Surprisingly, young people were most likely to say they plan to avoid stocks.

"Over 56% of 25- to 35-year-olds believe they can reach their investment goals without investing in the stock market," says David McSpadden, senior vice president of Global Client Marketing for Franklin Templeton Investments.

Avoiding stock market risk increases other types of risk, however. For instance, there's longevity risk, or the risk of outliving your money.

"You shouldn't think of short-term (certificates of deposit) and others as being risk-free assets. If you invest in CDs, you may have a guaranteed return of capital; but you don't have what is arguably more important, which is a guaranteed return on capital," says Webb.

People are "very sensitized to the risk of losing their capital -- not the risk of suffering a reduction of income, not sensitized to the risk of outliving their wealth. These are arguably more significant risks," he says.

Investing aimlessly

Then there are the investors who follow the herd as the market is going up, investing in hot sectors on a whim, often taking on more risk than they might otherwise.

"It's not only being too aggressive, but not having a whole plan. When the market is going up, they take on too much risk for their investment profile, and then when the market pulls back they are hurt and can't get the money back," says Christopher Zeches, vice president and chief investment officer of Zeches Financial Services in Tucson, Ariz.

In a similar vein, there are savers who managed to sock away money, but never came up with an investing plan.

"While it's common to hear about employees having lost great sums in their company-sponsored plans, usually because they've been too aggressive or aren't properly diversified, what might be more alarming is the fact that people have left their retirement savings in money market accounts for years. This is clearly too conservative and usually has more to do with a lack of direction than aversion to risk," says Gregory Hermes, senior vice president and financial adviser at First Financial Equity Corp. in Scottsdale, Ariz.

Retiring with no plan for income

Retirement is a gradual process that involves some planning. Ideally, people begin to transition their portfolio into retirement mode years before they actually hang up their working hats.

"I think that households lose sight of what the end purpose of this entire exercise is. The end purpose is to generate income in retirement, not to accumulate wealth," says Webb.

Throughout their career, workers have lots of time to squirrel away money and wisely invest in a range of assets. As retirement nears, the mix of investments needs to change, moving away from growth in accumulation toward a distribution and preservation stage.

"They need to rebalance their portfolio to make sure their risk tolerance is reflective of their age and timeline to retirement," says Nancy Coutu, Certified Financial Planner professional and principal of Money Managers Financial Group in Oak Brook, Ill.

That usually means scaling back equity exposure and increasing the amount of bonds in the portfolio

Holding on to the hoarding mentality

After decades of saving and investing, turning that lovely large account balance into a stream of income may hurt a little.

"I would at this point like to mention the A-word. That is the life annuity," Webb says. Very basically, immediate annuities are insurance against outliving your money. You give the insurance company a lump sum and they agree to give you a certain amount every year until you die. If you die early, they keep the money, generally.

"People view it as a risky gamble -- that they will lose if they die young," says Webb.

"The other thing is that people have trouble going from piles to flows. If I tell you that a lump sum of $1 million is going to give you an income of only $40,000 per year, your reaction is, surely that can't be right," he says.

The alternatives to annuities -- living off of interest and dividends or using the 4% rule for withdrawals -- can leave retirees subject to market whims or pursuing investment strategies based on their need for income instead of a prudent approach that optimally balances risk and reward.

Investing mistakes made during retirement can be much more detrimental to a retiree's standard of living than those made in the decades of working.