6 Ways You're Sabotaging Your Retirement

Written By
Paul Tracy
Updated January 16, 2021

Long before director J.J. Abrams made Star Trek cool again, I was a fan.

I've seen all of the movies -- from the first ones with Captain Kirk and his crew to the ones with Captain Picard and the Next Generation cast all the way through the latest, younger, hipper version that currently dominates the box office. Some are campy fun. Some are thrill rides. Some, frankly, aren't that great. And sometimes, I even learned something while watching.

One of the things I learned while watching Star Trek VI: The Undiscovered Country -- the last one with the original Enterprise crew -- is that the word "sabotage" comes from "sabot," a French word for shoes or clogs.

During the Industrial Revolution, protesting workers threw their wooden sabot into machines designed to replace them, intending to destroy the machines. A Vulcan crew member -- played by a pointy-eared Kim Cattrall, long before "Sex and the City" made her a major star -- shared this piece of wisdom.

While there are various theories surrounding the origins of the word sabotage -- including questions about whether or not the word is truly related to shoes -- there is no question that today sabotage refers to destruction.

In fact, sabotage is often associated with subtle methods of destruction, although throwing shoes into a machine isn't particularly subtle.

Sabotage can even take place in your finances. You might even be perpetrating financial sabotage on your own retirement portfolio.

Here's how...

1. Borrowing From Your Account

Your retirement account can seem like an ideal source of needed funds in a pinch. However, borrowing from your retirement account can have a big impact on you in the long run. Many investors think that, since they are paying themselves back, a loan isn't that detrimental.

Unfortunately, while you can replace the capital -- and even replace it with interest -- you can never replace the time lost. That capital is no longer earning returns, and there is no way to get back the compound interest you would have earned.

2. Paying Excessive Fees

What kinds of fees are you paying on the investments in your retirement account? For years, I stuck with the managed fund with a 2% expense ratio. That ate into my real returns, especially when I consider that I pay 0.35% now with ETFs, and I could even pay less with other funds.

High brokerage fees, expense ratios, and sales loads all eat into your returns. When you compound what you are spending on higher fees over time, we're talking about tens of thousands of dollars.

3. Trading Too Frequently

You might be surprised to find out how frequent trading within your retirement account can sabotage your long-term gains. Those who trade frequently are more likely to buy high and sell low. Additionally, more trading usually means more fees, which eat into your returns over time. If you have a good retirement plan that is fundamentally sound, there's no reason to muck it up with frequent trading every time you panic.

4. Failing To Diversify

Look at your retirement portfolio. Is it heavy on your company's stock? If so, it's time to diversify. Your asset allocation can make a big difference in how your retirement turns out. Consider whether or not you have the right mix in your portfolio. This means that you should include stocks, bonds, cash, and (if you have the risk tolerance) other investments.

Don't forget to diversify geographically as well, including foreign investments in the mix. While having some company stock isn't the end of the world, don't rely too much on it. Make sure you change up your asset allocation so that your retirement portfolio isn't destroyed by the tanking of one stock/sector/asset class/region.

5. Failing To Contribute Enough

Your retirement portfolio needs something in it to grow. Chances are that you haven't saved enough. You might be basing your monthly retirement account contribution on unrealistic returns, or you just might not be putting in what you need for long-term retirement success. It really doesn't matter why you are underfunding your account. What really matters is that you boost your contributions.

Just adding $200 a month more can make a big difference a couple of decades down the road through the magic of compounding returns.

6. Withdrawing Funds Too Early

Yes, it's possible to withdraw money early from your retirement account. Some investors withdraw money early because they think they are in an emergency or they want to help their kids pay for college.

Sadly, not only do you have the cost that comes with the removal of capital from your account, but you also have to pay a 10% penalty on the money if you are under 59 1/2. Additionally, you will need to pay taxes on the money if it is coming from a tax-deferred account. Early withdrawal sabotages you now and later.

And, if you are doing a rollover, make sure you do it properly. You don't want your legitimate rollover to be termed as an early withdrawal and result in costs.

The Investing Answer: Examine the ways you could be sabotaging your retirement portfolio and then make changes to your behaviors. The best defense against portfolio sabotage is a good plan that you stick to over time.

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