10 Huge Mistakes Millennials Make with Retirement Investing

blog Mar 11, 2019

1. Saving Without Investing

Saving is important, but saving without investing is a common mistake. As I write, the current return on a savings account is about 0.03%. Meaning it would take about 138 years to double the money you put in a savings account (think about that).

Every dollar saved is money you aren’t investing. I encourage millennials to hold no more than 6 to 12 months of their salary in a savings account. The goal is to grow your money so you can retire comfortably. The only way to do that is by investing.

2. Overpaying Student Loans

Most graduates have student loans and are stressed about it. This shouldn’t be the case, but, unfortunately, some financial experts encourage millennials to be scared of their debt. Many encourage them to pay it all off before investing. This is a mistake. And being scared of student loans is just plain wrong.

Most of these ‘old experts’ lived during a time where they could work over the summer to pay for college. We live in an entirely different time now. Prices of everything, including education, have soared. Working during the summer now can barely get you enough money to afford a college meal plan (much less pay the tuition).

Delaying investing to pay off student loans is a costly oversight. It can cost the average millennial millions of dollars of lost retirement funds. Experts that encourage millennials to hold off investing to pay off student debt are causing long-term financial loss.

3. Waiting to Begin Investing

Legendary investor, Warren Buffett, said the greatest wonder in the world is compound interest. He is right because money invested and left to grow over an extended period grows at an exponential rate. Kind of like a snowball that is pushed from the top of a mountain.

Surprisingly, the LONGER the money is left to grow, the LARGER the compounding effect towards the latter years of the investment. To put this into simple terms, the earlier you start investing, the GREATER the likelihood of building it into a fortune. The longer you wait (by overpaying student loans or your mortgage), the smaller your retirement portfolio. Don’t forget — a small retirement means you have to work during retirement. Rushing to pay off all debt (to be debt free) and not have enough money in retirement is not smart. It’s just poor financial planning on your part.

4. Ignoring 401K Plan Fees

Have you heard the saying “nothing is free”? Yeah, neither is a retirement account through your employer. A majority of individuals haven’t been cautioned about retirement account fees. Every 401K or 403B has a fee, and that money often goes to a Wall Street financial company.

Most employees assume their employer manages their 401K accounts. No, a Wall Street financial company does. And trust me, they want to take as much of your money as possible — so educate yourself on how to reduce the fees you pay.

The average fee on a 401K account is about 1.5%. I bet you didn’t know a 1.5% fee reduces your entire retirement by about 50% over a 35-year period? Yes, it does. In other words, if you should retire with $1,000,000, a 1.5% fee on your 401K will leave you with about $500,000 and the remaining half will be slowly handed to Wall Street. It is important for every employee to learn about their 401K fees and take the necessary steps to reduce the fees they pay. I go over this during my free private tutoring sessions.

5. Completely Trusting a Financial Advisor

90% of financial advisors earn their salary from the money you invest with them. As a result, there is a conflict of interest. Very few advisors will place client’s interests above theirs. As such, it is vital that you have an understanding of investing before meeting or taking on an advisor. Doing this will allow you to have a productive dialogue about your financial plan and aspirations. Lacking financial literacy and completely trusting an advisor with all of your life’s savings is not the best option.

6. Purchasing the Wrong Life Insurance Policy

Life insurance places value on your life and protects your family in the event of an unfortunate incident. It is an absolute MUST for anyone who has a child. The number of times I’ve seen individuals set up a Gofundme account when a spouse passes away is heartbreaking. Having financial stress after the loss of a loved one is the last thing a family needs. It is your responsibility to protect your family financially by securing the right life insurance policy. Typically, a term life insurance policy is all you need. Other policies are often over-priced and not essential, in my opinion. Buying term life insurance, without an investment plan in place, is not smart. After 30 years when the term life policy drops off, you want to have an investment in place to protect your family.

7. Buying Mutual Funds

A mutual fund is a very expensive investment. You might be tempted to believe an expensive investment is good, right? No — it is the exact opposite.

Mutual funds are padded with exorbitant fees that erase a significant portion of an individual’s wealth. Financial professionals that promote mutual funds to clients may not know the financial loss people incur from mutual funds. Most employees also DO NOT realize their 401Ks are possibly in mutual funds. This happens because Wall Street knows most employees don’t know the difference between an expensive fund and a more affordable fund (like the S&P 500 index). As a result, the average person ends up losing about 50% of their 401K to fees. By simply logging into your 401K account portal, every employee can select a cheaper fund choice, like an index fund. Unfortunately, most individuals don’t know how.

8. Failing to Understand How to Use a Health Savings Account

A health savings account can do more than cover your health care expenses. It can serve as an investment vehicle for retirement. When you place money into a health savings account, it grows tax-free, just like your 401K. Many millennials don’t realize a health savings account can also be used as a retirement account. In fact, some employers offer a free yearly contribution to employee health savings accounts.

At age 65, money can be withdrawn from your account completely tax-free if the withdrawals go toward healthcare expenses. The money can also be used for non-healthcare costs. Withdrawals for other expenses will incur a tax, just like a 401K does when you retire. I suggest you immediately look into getting a health savings account. I teach more about this in my Investing For Beginnerssession.

9. No Long-Term Financial Plan

How much do you want to be worth when you retire?

The reason I ask is simply because every journey begins with an end destination. A plane takes off knowing its final destination. You leave home knowing exactly where you are headed. However, most people don’t apply this principle to their financial life. We work for long hours most days, get paid every two weeks — but don’t have much to show for it. Without a long-term financial plan, you will live every passing moment of your life wondering where your money goes. A financial plan will specify how much you want to be worth when you retire. It will also help you figure out the investment vehicle and strategy needed to get you there.

10. Taking On Too Much Consumer Debt

There are two types of debt: good debtand bad debt.

Good debt is money borrowed that provides you with a source of income, or it gives you capital to buy an asset that will increase in value. A good example is a student loan or ‘possibly’ a mortgage, depending on the market. Good debt often allows you to write off the interest on your taxes, as well. Keep in mind debt is only considered good if it provides you with a source of income that allows you to pay the debt off over time. Or it provides you with an asset that increases in value.

Bad debt, on the other hand, is money borrowed to buy something that loses value. Example: a store credit card used to purchase clothes, sneakers, shoes, watches, etc. Another example of bad debt is a car loan, only because the car decreases in value every year. I’m not suggesting that borrowing money to buy a car is bad.

All I’m doing is classifying the debt based on what it really is — bad debt.

Note: anytime you borrow money; you are essentially reducing the amount of money you get to spend on yourself in the future. This is because you have to pay old debt with future cash flow. So, before you borrow, ask yourself, “Is it worth it?”

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