Mistakes People Make along the Way

After managing to put away a decent sum for their nest eggs, some people may find themselves tempted to use the cash today. Maybe there are children in the picture, creating the need for more space. And some workers may feel like they can afford a house now that their paychecks are bigger — if they could just finish saving up for that down payment. But by using that money now, some people could be setting themselves up to struggle in their later years. They buy an expensive house instead of a comfortable retirement.

Tax law allows workers to use their retirement savings to buy their first home, further adding to the temptation. The Internal Revenue Service allows penalty-free withdrawals of up to $10,000 from Individual Retirement Accounts for first-time homebuyers. There are similar allowances for 401(k) plans, but the withdrawal would come with a 10 percent penalty or in the form of a loan that would need to be paid back immediately if a person changed jobs.

People who struggled to save for a down payment may have a hard time covering maintenance, taxes and other expenses that arise as a result of home ownership, and that $10,000 might be worth much more in retirement if it had remained invested where it could build and compound interest.

The goal here is typically to keep children from taking out loans for college so that they can earn a degree (and the higher pay that comes with it) without being weighed down by debt. But the approach may backfire in the long run if parents are cutting back on their retirement savings to cover those education costs.

While there are multiple ways to pay for college, there aren’t as many options when it comes to paying for retirement. Some students may be able to work to cover expenses while they’re in school. Many colleges and universities offer co-op programs, in which the student works one quarter and goes to school one quarter. It may take a little bit longer, but they have received work experience. Companies are more attracted to co-op students because they will be of immediate value, whereas other students that have not had work experience may have to spend time in training before they are actually “profitable” to the company. Families can also consider less expensive options, such as state colleges or community colleges that have lower tuition rates than private universities. Plus putting their college education ahead of your retirement now could backfire for both parties. Eventually they may become a burden to their children.

People in their 50s should also be saving as much as they can, even if they have been saving all along. That includes saving at least 15 percent of pay and making additional catch-up contributions of up to $5,500 that the IRS allows for people age 50 and up.

Retirees should also be flexible about how they draw down those savings and stay open to changing their approach if their savings take a hit. For instance, someone who withdraws a fixed percentage of savings each year would withdraw less money after a market downturn than someone who takes out a set dollar amount. That could leave them in a better position to recover if the market rebounds because more of their savings would remain invested.³