According to some experts, millennials and Gen Z can expect to need $3 million in savings when they hit retirement age if they plan to retire in the US. Previously, people this age were often told $1 million in savings could secure a comfortable future. But, with the dramatic increase in living costs over the last several years, that number has tripled. And no one will meet that $3 million goal without a serious plan. But you’ll need to have a solid strategy that avoids retirement pitfalls. Here are the most common retirement mistakes you’ll want to avoid.
7 Retirement Mistakes to Avoid
Here are seven retirement mistakes many people make:
1. Not having a retirement plan
The first mistake people make is not having a retirement plan. They think everything will work out if they put aside 10% of their paycheck into a savings account or tackle retirement later in life. Unfortunately, that’s not the case for most people. If you don’t make (and stick to) a retirement plan, you could end up working well into your 70s to pay your bills.
Instead, ensure you have a retirement plan that includes the following details:
- A goal of how much you want to save by retirement age depending on your estimated living costs
- A monthly contribution amount that will get you to your retirement goal
- A plan for making your savings grow (beyond just sitting in a low-interest savings account)
- An annual check-in where you review and adjust your plan if anything changes (you get married, receive an inheritance, move to a cheaper cost-of-living state, incur medical debts, etc.)
2. Not starting early … or not starting today
If you’ve read anything about retirement, you likely have heard the phrase compound interest. Compound interest is the interest earned on top of your previous interest, which is added to your principal balance. Essentially, the longer you have money sitting in an account, the more compound interest it can accrue.
Thanks to compound interest, your retirement savings will grow exponentially. So, the saying goes, the best day to start is yesterday. Otherwise, the best day to start is today.
Here is an example that illustrates the power of compound interest. Let’s say two individuals will set aside $1,000 monthly for 10 years. Sarah starts at the age of 20 and stops at 30. After that, she no longer contributes, but the account grows interest. Paul starts at 40 and stops at his retirement age of 50.
Both of these people contributed the exact amount over 10 years. But, assuming a 7% interest rate, Sarah will have almost $1 million at her retirement age, while Paul will only have $250,000.
If you don’t understand the power of compound interest, you might convince yourself it’s okay to start later and catch up. But time is on your side; the earlier you start, the better.
3. Not taking advantage of your employer’s 401k match
If your employer offers a 401k match, that’s free money towards your retirement. Prioritize maxing out this benefit to take full advantage of it.
4. Not understanding your Roth IRA
Did you know if you put money in your Roth IRA, it doesn’t automatically get invested? Many people make this mistake. When you add money to your Roth IRA account, you’re just making a deposit. If you have this account with a bank or credit union, it’ll simply earn a small 1-2% interest. Instead, the better option is to take an additional step to invest it so it can earn money for you.
5. Avoiding investing
Speaking of investing—this is probably one of the most crucial steps you need to take to work towards a stable, secure retirement.
Many people make the mistake of being too scared to invest. They think you can only start if you have thousands of dollars. But that’s the farthest thing from the truth. You have many options today to get started in investing, including:
- Learning about investing from videos, podcasts, books, and blogs so you can do it yourself
- Paying a financial advisor
- Opening an account with a bank that has a roboadvisor that will do all your investing for you depending on your risk preferences
Whatever the case, you need to invest, and you need to start today. According to Forbes, the average stock market return since 1971 is 10% if you reinvest dividends. With the power of compound interest, you’ll watch that small amount you set aside monthly grow into substantial savings.
While the stock market is the most common route for investment, you could also grow your retirement savings with real estate investments. You can purchase rental properties and accrue rental income and property equity.
6. Retiring with debt
You need to prepare well for retirement because you’ll be handling all the regular costs of living without having a steady income to support you. One of the biggest retirement mistakes people make is starting retirement with debt. When you have debt, you not only pay high interest on the amounts, but you also reduce your disposable income.
Start learning how to be debt-free now so you don’t have to deal with this headache in retirement. You can do this by:
- Consistently paying your bills on time and in full
- Learning how to stick to a budget
- Only spend within your means
- Have a plan to pay off your mortgage and any other large debts well before retirement
7. No plan to pay for healthcare
It’s natural for people to experience healthcare complications more frequently as they age. Unfortunately, many insurance providers capitalize on this and make insurance plans for seniors incredibly expensive for full coverage. To give yourself peace of mind and avoid large medical bills, prepare to pay for a comprehensive healthcare plan in your retirement. This might cost a lot upfront but can save you money in the long run. And if you plan for this expense ahead of time, it won’t feel like such a burden on your retirement budget.
A Comfortable Retirement is Possible if You Plan Now
Retirement should be an enjoyable and liberating stage in your life. But this will only be possible if you start preparing for it today. Now that you know which retirement mistakes to avoid, you should be set up to start. Don’t let another day go by without making progress for your retirement—your future self will thank you!
You might also be interested in: Traveling In Retirement: Budget-Friendly Tips For Exploring The World
