3 Huge Mistakes You Risk Making When Investing for Retirement

Once you retire, you're going to need income outside of Social Security to cover your expenses.

If you earn an average paycheck during your working years, you can expect Social Security to replace about 40% of it one you're ready to start getting benefits. But it's common for retirees to need about 70% to 80% of their former income to manage their expenses without too much stress. So it's important to have a nice amount of savings to supplement your Social Security.

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But the money you save in an IRA or 401(k) plan should not just sit in cash earning you very little. It's important to invest that money so it outpaces inflation over time.

There are certain mistakes savers risk, though, when it comes to investing for retirement. Here are three you should try to avoid at all costs.

1. Investing too conservatively

The stock market can be a scary place to put your money. Sometimes, the market can swing wildly from one day to the next.

If you're someone who's naturally risk averse, you may be inclined to keep your retirement savings in cash and bonds to avoid the headache. That's a dangerous move, though, because it could end up stunting your savings' growth.

Imagine you stick to conservative assets that result in a 4% yearly return. If you save $300 a month in an IRA or 401(k) over 30 years at that return, you could end up with about $202,000. But if you load up on stocks so your portfolio generates a yearly 8% return, you could end up with about $408,000 instead. Which figure would you rather retire with?

2. Selling stocks at a loss during market downturns

When the stock market is in a slump, it's natural to want to unload some of your investments before they lose even more value. But that's a move that could cost you.

If you're years away from retirement, your best course of action during a stock market downturn is to sit back and do nothing. Of course, you could also add stocks to your portfolio while they're on sale. But if you sell stocks when they're down, you'll lock in permanent losses, guaranteed. Waiting things out is a better bet, especially when you have many years to ride out a decline.

If you don't trust yourself to leave your portfolio alone during a period of market upheaval, simply stay out of it. Don't log in and check on your stocks daily when you know the market is tanking. If you're a long ways off from retirement, there's no need to torture yourself mentally. And you might then make a rash move that hurts you in the long run.

3. Dumping all of your stocks before retirement begins

It's common for retirees to scale back on stocks to minimize risk in their portfolios. But there's a big difference between doing that and getting rid of your stocks completely.

Once you're retired, you may need to tap your portfolio on a regular basis for income. So you want your investments to continue to grow and generate decent returns. Continuing to hold stocks could help you meet that goal and help ensure that your portfolio makes it possible to cover your expenses without worry.

What percentage of your portfolio should you keep in stocks during retirement? That's up to you. You can consult a financial advisor to come up with an allocation that meets your needs while allowing you to avoid undue stress.

Saving and investing is perhaps the best way to set yourself up for a secure retirement. But make sure to avoid these big mistakes so your efforts aren't a giant bust.

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