5 Irrational Retirement Decisions

US News

Sometimes investors make retirement decisions that aren't in their best interest. Whenever you pass up a 401(k) match or pay high fees on your investments, you're ultimately hurting your own retirement security. Here are some common irrational retirement decisions to avoid:

[Read: 10 Trendy 401(k) Plan Perks.]

Passing up a 401(k) match. A 401(k) match from your employer is likely to be the best possible return you can get on an investment. If your company provides a 50 cent match for each dollar you save, a $1,000 401(k) contribution will get you another $500 from your employer. "The money that you are leaving on the table by not setting aside some money to get the match amounts to a huge amount of dollars. You cannot beat getting that money set aside compounding for you," says Bob Phillips, a certified financial planner and managing principal at Spectrum Management Group in Indianapolis. "Once you make the commitment, you will adapt to the new take-home pay and never miss it beyond that point." Of course, you won't get to keep the match until you are vested in the retirement plan, which can vary from immediate vesting to requiring five or six years of service before you can take the entire match with you if you leave the job. But you will get a more timely tax break for your traditional 401(k) contributions.

Missing out on retirement tax breaks. Contributing to a traditional 401(k) or IRA can save you a significant amount of money on your current tax bill. For someone in the 25 percent tax bracket, contributing $3,000 to a 401(k) will save you $750 in taxes. "Taxes are an expense," says Marshall Groom, a certified financial planner and founding principal of Groom Financial Advisory. "When you put a little money in a 401(k), your expenses go down because your taxes are going down." The more you are able to tuck away in retirement accounts, the less money you will need to pay regular income tax on. Income tax will not be due on these investments until you withdraw the money in retirement.

[Read: How to Save for Retirement on a Small Salary.]

Ignoring 401(k) fees. Employees can now find out more about the fees being deducted from their 401(k) plans, due to new Labor Department rules that require plan sponsors to disclose that information. But only about half (53 percent) of 401(k) plan participants report having reviewed the fee information, according to a 2013 Employee Benefit Research Institute survey. And among those who noticed the information, only 14 percent made changes to their investments as a result. "If you are paying a high fee in a mutual fund for the management of that mutual fund, plus you are paying a fee within your 401(k) account to the custodian that is managing it, you are losing out on growth and returns that could be in your pocket if you were using a lower-fee fund," says Melissa Hammel, a certified financial planner for Hammel Financial Advisory Group in Brentwood, Tenn. "If you are in a mutual fund that has a 2 percent expense fee built into it and there is an annual 1 percent fee on your account, if your return on that account is 7 percent, you are losing 3 percent of that in fees. You are going to end up with a 4 percent return. If you were in a lower-cost situation, you could pocket more of the return in your account."

Cashing out a 401(k) plan. Unless you are facing an extreme financial hardship, it almost never makes long-term financial sense to cash out a traditional 401(k) or IRA account early. On most retirement account withdrawals before age 59 1/2, you will need to pay a 10 percent early withdrawal penalty and income tax on the amount withdrawn. For example, a 40-year-old worker in the 25 percent tax bracket who withdraws $3,000 from a 401(k) will face $1,050 in taxes and penalties. "A lot of companies will allow you to just leave your plan at the company and let it continue to grow, or you can roll it over to an IRA and that's a tax-free event," Hammel says. You may also be eligible to move the money into your new employer's 401(k) plan without incurring taxes or penalties.

[Read: 12 Ways to Increase Your Social Security Payments.]

Claiming Social Security at 62. Many people sign up for Social Security as soon as they are eligible at age 62. However, your payments will be permanently reduced if you sign up at that age. Most baby boomers won't qualify for the full amount of Social Security they have earned until age 66. And Social Security payments will be further increased for each year of delayed claiming up until age 70. "When you sign up at 62, you are going to get a 25 percent haircut off what your benefits would be at 66," Phillips says. "If you die early, you would be better off taking the money at 62. If you have longevity in the family - anything beyond 75 - you will really be much better off to wait."



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