Common errors young people make with retirement savings

Key Takeaways

• Retirement savings strategies vary for each individual; however, delaying the start of saving and failing to contribute enough to receive an employer match can be detrimental.

• Maintaining funds in cash or adopting overly conservative investment strategies, especially when time allows for recovery from market fluctuations, can impede financial growth.

• While employer-sponsored retirement plans are a common investment avenue, alternatives such as individual retirement accounts (IRAs), health savings accounts (HSAs), and taxable brokerage accounts are also available for future planning.

Based on my research, 38% of retirees surveyed indicated they would have prioritized saving earlier if given the opportunity to revisit their financial decisions. To plan a future free from savings regrets, consider beginning your retirement savings as soon as possible and steer clear of these nine other common retirement savings mistakes. If you have already made one of these errors, rest assured that remedies are available.

1. Delaying Retirement Savings

While you may wish to begin saving for retirement immediately, financial obligations such as rent, student loan debt, credit card debt, or child support payments may seem prohibitive. It is essential to cover your rent, but not all debts should be prioritized for immediate repayment. The general guideline is to prioritize debts with an interest rate of 6% or higher. For debts with lower rates, consider making only the minimum monthly payment and investing some of your funds instead. This approach could potentially yield greater returns from market investments over time than the interest accrued on a low-rate loan. Here's how to balance debt repayment with saving.

2. Neglecting Employer 401(k) Matches or Other Contributions When Assessing Job Offers

When evaluating a job offer, consider more than just salary and paid time off. Assess whether the company provides a defined contribution plan, such as a 401(k), which enables you to allocate pre-tax dollars for retirement, and whether they match your contributions. These matches are essentially additional compensation, enhancing your potential retirement savings. Review vesting schedules as well, which determine the duration you must remain with the company to retain employer contributions. (Your personal contributions are always yours.) Additionally, verify if your employer offers and matches contributions to other accounts like health savings or emergency savings accounts. These contributions can also support your future savings.

3. Insufficient Contributions to Your Retirement Account

Understanding employer matches is crucial: If your employer offers to match your contributions to a 401(k) or other retirement plans, failing to maximize that match means you're missing out on potential benefits. Black Investors Coalition recommends contributing at least enough to your employer's plan to secure the full match.

As your salary increases over time, aim to gradually increase your savings until you are contributing 15% of your pre-tax income, including employer contributions. If reaching 15% is not feasible, determine what you can afford and contribute that amount. Ideally, strive to reach the contribution limits for each retirement account to maximize your benefits.

4. Keeping Contributions in Cash

Contributing to a retirement account is a commendable step. However, to fully benefit, you need to invest those funds. Leaving contributions as cash means they won't benefit from compounding growth. Explore your investment options within employer-sponsored accounts and select investments that align with your goals.

5. Overly Conservative Investment Strategies

Investing inherently involves risk, with the possibility of market losses. However, risk is often necessary for potential rewards. While past performance is not indicative of future results, the stock market generally appreciates over time, and taking calculated risks can lead to higher returns. Although downturns occur, individuals in their 20s or 30s can typically afford riskier investments due to the time available to recover from market fluctuations.

Your employer-sponsored retirement plan may offer options such as target-date funds, which are diversified portfolios aimed at future savings goals like retirement. Investors choose a fund with a target year close to their expected retirement date, and the fund manager adjusts the investment mix to become more conservative as the target date nears. Additionally, asset allocation funds are available, which are tailored to align with an investor's risk tolerance.

6. Maxing out too early and missing out on matches

For those fortunate enough to be able to max out their 401(k)s early in the year, be aware: there is such a thing as too early. Some employers might match contributions on a per-paycheck basis, and if an employee has already hit their max, they can't make further contributions that year for the employer to match. Some companies will make sure those employees get the full match by giving the entirety of the annual match through what's called a true-up contribution to the employee's retirement plan. But not all do—and you don't want to miss out.

7. Not looking for alternatives if you can't access an employer-sponsored retirement plan

No employer-sponsored 401(k) or 403(b)? No issue. If you have earned income, there are still numerous retirement savings options available to you, such as a solo 401(k), a traditional IRA, a SEP IRA (Simplified Employee Pension Plan), and a Roth IRA, depending on your income type. It is crucial to have a retirement plan due to the tax benefits they offer, which can enhance your savings and reduce your long-term tax liability. Ensure you monitor contribution limits across plans to avoid overcontributing. Contribution limits apply to the entire retirement savings plan category—such as IRAs as one category and employee plans as another—not to individual plans. For example, you can contribute to a 401(k), Roth 401(k), a traditional IRA, and a Roth IRA (if you meet eligibility requirements) simultaneously. You will be subject to employee plan contribution limits for 401(k) contributions and separate IRA contribution limits for the total contributions across a traditional IRA and a Roth IRA.

8. Assuming your retirement accounts are the sole investment vehicles you need

Retirement accounts, including employer-sponsored plans, solo 401(k)s, IRAs, and even HSAs, which can be utilized for retirement healthcare expenses, have contribution limits. However, if your income allows for savings beyond these limits, consider opening a taxable brokerage account to further increase your savings. Similar to other accounts, it offers the potential for growth over time by enabling you to hold investments that may appreciate in value. Notably, there are no contribution limits on a brokerage account, allowing unlimited savings. Unlike retirement accounts, a taxable brokerage account does not provide tax advantages for contributions and withdrawals. It is important to note that while IRAs and HSAs are types of brokerage accounts, they are tax-advantaged, not taxable.

9. Misconception About Income Limits for Roth IRA Contributions

Roth IRAs allow for contributions with after-tax dollars, and qualified withdrawals, including earnings, may be tax-free under specific conditions. While Roth IRAs have both contribution and income limits, a high salary does not necessarily disqualify you from contributing. In 2025, single filers earning less than $150,000, or married couples filing jointly earning less than $236,000, can make full contributions to a Roth IRA. Those earning between $150,000 and $165,000 as single filers, or between $236,000 and $246,000 as married filing jointly, may be eligible for partial contributions. Traditional IRAs do not have income limits, and contributions can be made to both types of accounts simultaneously, provided the IRA contribution limit is not exceeded across all accounts.

10. Consequences of Early Withdrawals, Loans, or Cash-Outs from Workplace Retirement Plans

Withdrawing funds from your workplace savings plan, whether as a withdrawal or loan, can have significant tax implications. Withdrawals are considered ordinary income, and if taken before age 59½, a 10% penalty may apply unless specific exceptions or a hardship withdrawal qualification is met. Loans from employer-sponsored retirement plans accrue interest, and if you leave your job, the loan may need to be repaid immediately. Failure to repay could result in the loan amount being taxed as ordinary income, in addition to a 10% early withdrawal penalty if under age 59½.

While sometimes unavoidable, cashing out or abandoning your workplace plan when changing jobs can be detrimental. According to a 2023 report by Capitalize, a company assisting workers in maintaining their retirement investments when switching employers, Americans have left behind or forgotten 29.2 million accounts, totaling $1.65 trillion in assets. To avoid such losses, consider rolling over your employer plan funds into another eligible retirement plan.

Best Regards,

Stock Market Charlie a.k.a The Hound of 317