Mistake #1: Waiting to save. Young people (folks in their 20s) tend to be focused on hobbies, travel and entertainment. There are so many things they think they need. Saving is a low priority if it’s even thought of. There are exceptions, of course. And young people who do save (even a little) for retirement take advantage of a powerful tool – compounding interest. Money you invest early in your career will have more time to grow.
Mistake #2: Cashing out a retirement plan. According to a Bureau of Labor Statistics survey reported on by The Wall Street Journal, workers between the ages of 18 and 42 have held, on average, 10.8 jobs. Because of the frequency with which young people change jobs, they are apt to cash out their retirement plans. Instead, young workers should roll over their plans to retain the same tax status for retirement purposes.
Mistake #3. Dipping into your retirement plan. This one and mistake #2 are related. Young people who’ve set up a retirement plan sometimes tap these plans to buy a house or a car. The provisions in some plans allow for this. But, when young people do this, they are fundamentally forgetting why they saved the money. Earmark money for different purposes and avoid drawing on it unless it’s part of your original plan. See our post below titled, “Should you tap into your retirement plan before you retire?”
One last thought: When the market swings for a big loss, investors see their money lose value. It’s depressing, sometimes scary. Young investors can put the market’s gyrations into perspective by jotting down their near- and long-term goals. This might be the first time they’ve ever written down their financial goals. That’s okay. It doesn’t have to be overwhelming. Even a casual planning session can put people on their way to better understanding their situation. Having short- and long-term goals helps young people avoid the top 3 mistakes described here.
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