5 Mistakes That Will Hurt Your Retirement Savings Effort

• Author: Jeffrey Simmons
• Posted: 2024-07-06

While you should live in the moment, you cannot live completely in it. Instead, you need to focus on the future insofar as you must save for retirement. Otherwise, you can find yourself relying on just your Social Security, which is not enough to live on for most older Americans. Retirement saving is never easy, but forethought and the right decisions can help you manage better than most. This is an area where mistakes can set you back and harm your standard of living once you stop working. Here are five common retirement mistakes that you want to avoid.

Waiting Too Late to Begin Saving

While retirement seems so far away, your first years working are when you need to begin saving. This is because you can take advantage of the power of compounding. Even if you only manage to save a little, this will help you 30-40 years into the future when the money has already multiplied many times over. If you wait too long to begin saving, you will lose much of the benefit of compounding. This is what ensures your ability to retire. If you start saving at 40, your money can only increase by a multiple of about 4-5x assuming a normal rate of return. That helps, but is not what can enable to retire with a more comfortable standard of living.

Don't Take Social Security Too Early

Many people rush to take Social Security at the first possible opportunity so they can stop working. However, when you start drawing benefits at 62, you are leaving much money on the table. While we are not necessarily saying that you keep working until 70 to draw the maximum benefit, the best thing is to wait until 67 to start taking Social Security. Your monthly benefit would be reduced by 30% and could mean the difference between having enough money in retirement and being lacking. Given that life expectancies are going up these days, you need to be concerned about outliving your resources.

Investing Too Conservatively

We are not telling you to swing for the fences in your retirement account. If you make a large mistake, it can set you back years. However, being too conservative means that you will not be able to take advantages of increases in the stock market. These are how your money grows and you are able to retire. One major mistake that people make is to put their retirement investment solely into bond funds. These only pay you a few percent each year and will not multiply by many times when you retire. The ideal mix is to have about 80-85% in stock funds. Within that construct, you should have some stock funds that are riskier than others. You should have some growth funds and others that are more conservative in order to achieve the proper balance or risk and return.

Planning to Work Forever

Many people say that they can keep working indefinitely so they do not need to worry as much about retirement saving. Depending on what you do for a living, that may not be possible. If your job is physical in nature, you may not want to be standing on your feet and exerting effort each day when you are well into your sixties. You never quite know how you will feel physically and mentally years into the future. You want to at least be able to have the flexibility to retire if that is what you want to do at the time. Planning to work without a set retirement date will tie your hands financially because you will not have the freedom to make the choice when the time comes. Current stats show that most Americans are retired by the age of 65, and there is a reason for that.

Withdrawing from Your Retirement Account Early

Unless you absolutely have to, you should never take money out of your retirement account. This includes loans from your 401(k), which you should only take if it is a necessity. When your borrow money from your retirement, you have to take it out of the market. If you have the loan in an average year, you can ben forgoing the average annual investment return of roughly 7%. Not only are you paying interest, but there is the opportunity cost of keeping your money out of the market.