Saving for retirement sounds so straightforward: You put away as much as you can afford to each month, and in return, you get a source of income once you stop working. But in reality, there are many ways to make expensive mistakes. At best, these can mean you don’t get to do as many of the things you wanted, and at worst they may mean you have to delay retiring so you can afford to live comfortably.
Here are three big retirement mistakes to watch out for.
1. Waiting to start saving for retirement
If you’ve ever read anything about retirement on the internet, you’ve probably heard about the magic of compound interest (™). But there’s a reason why everyone brings it up: It can be a powerful tool. That said, if you’re not saving for retirement early in life, it can also hurt you.
Let’s say you save $6,000 in a retirement account at the age of 22. If you were to invest that amount until age 65, it would grow to almost $50,000. And that’s assuming you never contributed anything else to that account. However, you’d only have about $33,000 by waiting to do this until age 30. That’s assuming a low 5% annual rate of return. Over the years, you could stand to lose a substantial amount of money for retirement. So it’s always best to start as early as you can, even if that means only contributing $25 a month.
2. Ignoring Roth IRAs
The type of accounts you use can also have a major impact on how much you actually have to retire on. For example, both 401(k)s and traditional individual retirement accounts (IRAs) lower your taxable income now. The tradeoff, however, is that you’ll have to pay taxes on those funds in retirement, reducing how much you actually get to live on.
That’s where Roth IRAs come in handy. While you won’t get the tax benefits now, you get to keep all of that cash in retirement (assuming you make qualified distributions), which can help you mitigate your tax burden in retirement. And the limit for IRAs (including Roth IRAs) is separate from a 401(k), so you can still contribute however much you want or can to that account while also contributing to an IRA. You just have to open the account, set up deposits, and make sure that cash is being invested.
3. Not readjusting your investing strategy as you get older
If you’re only considering your retirement investing strategy whenever you change jobs, you may be putting yourself at a disadvantage. That’s because, in general, you’ll want your investment mix to become more conservative the closer you get to retirement.
Typically, that means reducing the proportion of higher risk stocks, and increasing the proportion of bonds. You can use the rule of 110 — where you subtract your age from 110 — to estimate the right percentage for stocks. So by the time you’re 50 years old, that rule says 60% of your portfolio should consist of stocks.
Think of it this way: If you’re planning on retiring in 20 years, you can afford to weather shorter-term financial storms. But if you’re retiring in just five years, hits from market lows can have a greater impact on your savings. For instance, there may not be time for you to earn those losses back, meaning they’ll be locked in when you take some of that cash out. So you’ll want to make sure that your portfolio is becoming less risky over time to avoid that issue.
Saving for retirement is important, but it can also be tricky to accomplish if you don’t know the many pitfalls you need to avoid. But by taking steps to guard against losses and starting to save early, you’ll be in a better position to retire when the time comes.
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