5 Common Retirement Savings Mistakes
The U.S. is experiencing a severe crisis when it comes to saving for retirement. According to a 2017 U.S. Census Bureau study, 49% of adults ages 55 to 66 had no retirement savings. The median amount workers have saved for retirement is only $97,000. With people living longer and longer, rapidly rising healthcare costs, inflation, and the disappearance of pension funds, many Americans are going to find their retirement savings accounts significantly underfunded.
Having enough saved for retirement is critical for financial security in your later years, but it can also provide you with extra freedom and a backup plan when things go wrong. During the pandemic, for example, many older Americans decided to retire early when their job disappeared. Ageism has made it difficult to get hired into new and better jobs, and many people appreciate having the flexibility to retire a little earlier than expected.
In addition, having a healthy retirement savings account can give people flexibility to quit a job without having another lined up, stay home with children for a few years, or to start working for oneself.
With all this in mind, it’s important to get started as soon as possible and to avoid making these common retirement savings mistakes.
Mistake #1: Not saving for retirement
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According to Fidelity’s 2022 State of Retirement Planning Study, 45% of Millennials and GenZ “don’t see the point” of saving for retirement. My conversations with people about this revealed pessimism about the future, including the belief that climate change will eliminate the need for retirement savings. Many Millennials and GenZ members are struggling to make it financially in the present and the idea of trying to figure out how to also save for retirement just feels impossible.
But this is a big mistake.
First, there’s a far greater chance that you’ll end up living longer and needing more money than there is that the world will be so destroyed that we’ll all be dead. Saving for the future can actually be beneficial in helping you feel like you have more control in a world with many challenges.
Second, by not saving now, younger people are missing out on time. The earlier you start saving, the less money you actually have to save because of how investing works.
Tips:
Start small if you have too. Many retirement accounts have no minimums, so even if you can only do $10 a month right now, start anyway. Then work to increase the amount. The important thing is to start building the habit of saving for retirement.
If you don’t have a retirement account, first check with your employer to see if they offer a plan. If not, open a Roth IRA or a traditional IRA.
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Mistake #2: Not Saving ENOUGH for retirement
Starting small is a great way to start saving if that’s all you can do. However, you’ll need to work toward increasing that amount so that you have enough when you finally retire. One common recommendation is to save at least 10-20% of your income, but with longer lifespans and rising healthcare costs, the more you can save the better.
Tips:
Each time you get a raise, make sure you increase the amount you save for retirement as well.
Anytime you receive a tax refund, bonus, or other one-time lump sum, putting at least some of it in a retirement account can really boost your savings.
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Mistake #3: Not taking advantage of your employer match
As companies have moved from offering pensions to 401k, 403b, and 457 plans, they have traditionally offered employees extra money as an incentive to use the company plan and save for retirement. (Although it seems like fewer and fewer companies are offering this benefit.) This is usually called a “match.”
Here’s how it works: Your company offers you a retirement plan as part of your employee benefits. You sign up and have a certain percentage of your salary sent to your retirement account. The company then puts an additional amount into your retirement account.
This is extra money that you would not receive if you did not save for retirement! FREE MONEY!
For example, when I worked for a non-profit publishing company earlier in my career, we had access to a 403b pl401kan (basically a 401k for nonprofits). My employer’s policy was to match 50% of my contribution up to 3% of my salary. So if I contributed 6% of my salary, I would get an extra amount worth 3% of my salary added to my 403b account. If I contributed more than 6%, their contribution was still capped at 3%. If I contributed 2% of my salary, they would give me 1%.
If you have access to one of these plans, and your employer offers a match, you need to contribute at least enough so that you receive the match. If you don’t, you’re turning down extra money.
Tips:
When considering a new job, look to see how much the company will contribute to a 401k (or other) on your behalf. It is part of the complete benefits package.
If your employer doesn’t offer a match, you might prefer to start investing in a Roth IRA or traditional IRA.
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Image: @firmbee on Unsplash
Mistake #4: Not investing the money with an appropriate investment strategy
Soooooo many people don’t know that they have to invest the money once it is deposited in your retirement account. If you don’t do anything with it, it just stays in what is called “cash” or a “cash equivalent.” This just means that your money will not grow. It’s the same as dumping it in your savings account or stashing it under your mattress.
Not only will your money not grow, but it will actually lose value due to inflation. Right now we are all very acutely aware of how our money buys less than it did a few years ago. Imagine that level of inflation, only worse because of the longer timeline.
You must invest your money in order for it to grow. If you don’t, you will for sure not have enough in retirement and you will miss out on a lot of extra money!
I’m not an investment advisor and will not recommend any particular strategy, but you should know that you do need a strategy. This might be working with an investment advisor to select specific investments according to your preferences and risk tolerance. Or, it could be investing in a diversified set of index funds. Putting all your money in bitcoin or in any single stock is NOT an investment strategy.
Do some research if you’re a DIY kind of person or work with a robo advisor or other investment advisor to develop a strategy that’s right for you. Whatever you do, don’t just let your money sit there in cash.
Tips:
Find a good book, website, or podcast to educate yourself about investing.
Adopt the right investing mindset to weather the ups and downs of the market.
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Mistake #5: Not updating your beneficiaries
Beneficiaries is a fancy term for the people who will get any money left over when you die. Money in a retirement account typically passes to your heirs through a beneficiary designation. You can likely log into your account and select or change your beneficiaries right then and there.
Do this now! And if you have set up your beneficiaries in the past, go make sure you still want those people to inherit your money.
One of the most heartbreaking money scenarios I see is people who forgot to update their beneficiaries and their ex-wife or ex-husband inherits the money instead of the current spouse. Don’t let this happen to you.
Tips:
Log into your retirement account and add, update, or change your beneficiaries today.
Put an appointment in your calendar every year to check your beneficiaries in case you forgot to after you got divorced, had another child, etc.
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