A recent study from Northwestern Mutual revealed that the “magic number” for Americans to retire comfortably in 2025 is $1.26 million, down from $1.46 million last year. However, only 25% of Americans with retirement savings have set aside just enough for one year. If you’re interested in getting serious about retirement planning, you’ll want to ensure that you utilize all of the resources available to you.
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One of the best retirement planning tools is a Roth IRA and below, we will examine one common mistake you want to avoid so that you don’t hinder your future self.
Chad Gammon, certified financial planner (CFP) and owner of Custom Fit Financial, pointed out that contributing to a Roth IRA is a great idea, but that many contributors forget to check if it’s properly invested. “The first step is to log into your Roth account and check to see if you’re investing in the funds you wish for. This should be based on your risk tolerance and goals,” he said.
A common mistake is not actually investing your Roth IRA in anything after you’ve contributed money to it. This means that your funds aren’t growing or benefiting from compound interest. While it’s helpful to save money for retirement, you want these funds to grow so that when you’re ready to leave the workforce, you have enough money to live comfortably in your golden years.
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“Financial mistakes begin early in life and the biggest financial mistake people make is taking too little risk, not too much risk,” said Robert Johnson, Ph.D., chartered financial analyst (CFA), chartered alternative investment analyst association (CAIA) and professor of finance at Creighton University. “Unfortunately, many people allocate retirement savings to money market accounts or low-risk bonds.”
This investing mistake will cost you money because you’re missing out on the benefits of compound interest, which means that you’re leaving money on the table that could be used to fund your future lifestyle.
There are two main reasons why you should double-check your Roth IRA account once in a while.
Gammon noted that you should periodically check in on your investments to ensure they’re being managed as you intended. You should also rebalance to keep your desired asset allocation. You don’t have to be actively involved in managing your retirement nest egg frequently, but you want to be confident about the trajectory of the account.
“The easiest way to build a large nest egg for retirement is to allow the power of compounding to grow your investments exponentially over time,” explained Doug Carey, chartered financial analyst (CFA) and founder of WealthTrace.
“You have $50,000 in your Roth IRA and it’s sitting in a settlement account, earning 0% interest. In 10 years, you’ll still only have $50,000. If instead you had invested it in a low-cost Exchange Traded Fund (ETF) that earns 8% per year, you would have had $108,000. Over 20 years, you would have $233,000 vs. $50,000 if it earns nothing,” Carey said as an example.
This is just one illustration, but it highlights how much money you’re missing out on if you don’t invest your funds in a Roth IRA. You don’t want to be stuck working longer than you want to or be forced to lower your quality of life in retirement because you made one simple investing mistake.
“The surest way to build wealth over long time horizons is to invest in a diversified portfolio of common stocks,” Johnson added. “Someone with a long time horizon should not have exposure to money market instruments, yet many investors do because they fear the volatility of the stock market.”
It’s also worth pointing out that when you’re younger, you’ll want to take on additional risks with your retirement funds since you have more time, so you won’t have to get desperate and sell assets at a loss.
The experts agreed that the best way to recover from this investing mistake is to make changes immediately and to focus on the future. You can’t go back in time, but you can focus on setting the stage for an enjoyable retirement. This is why you ensure that your Roth IRA is being invested in the stock market based on your personal risk tolerance.
Johnson emphasized that you should start investing in a low-fee, diversified equity index fund and continue to make consistent investments, regardless of the market’s direction. As always, we highly recommend that you work with a financial professional to ensure that you’re on track to reach your financial goals.
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This article originally appeared on GOBankingRates.com: How 1 Small Investing Mistake Can Derail Your Roth IRA Investment