If you're in your 30s, chances are you're a decade or more into your working lifetime, and now is a good time to take stock of your progress toward retirement. Unfortunately, too many 30-somethings are preparing for retirement the wrong way, or -- worse yet -- aren't preparing at all.
We asked four of our contributing writers for common mistakes people in their 30s make that could have devastating effects on their retirement. Do any of these apply to you?
Matt Frankel: Younger investors won't need their nest egg for decades, and should have the highest tolerance for risk while they're young.
However, recent data shows they're doing the opposite of what they should. A recent survey by Capital One ShareBuilder showed that 60% of millennials distrust financial markets. A separate analysis by State Street concluded that millennials are holding 40% of their portfolios in cash. Today's 30-somethings have lived through two major crashes -- the dot-com bubble and the financial crisis -- so this aversion to risk is understandable.
Still, with such an extended investing time frame, younger investors should ignore short-term market moves and invest for the long term. For example, an investor who bought an S&P 500 index fund at the 2007 peak, the worst time in the past decade, would have recovered from the crash and would be sitting on a 70% gain now.
In short, if you have a long time before retirement you should be primarily invested in stocks -- meaning almost your entire portfolio. Buy more when prices are high, and buy more when prices are low. You'll end up a winner by the time you need the money.
Selena Maranjian: A big mistake many 30-something people are making is not contributing enough to their retirement accounts. For example, Fidelity Investments reported that in 2014 the average employee saving rate for 401(k) accounts it administered was 8.1% -- which happened to be a multiyear high. That might sound good, but if you're earning, say, $50,000, it's just about $4,000.
That can seem like a lot of money, and in many ways it is. But here's what 30-somethings need to know: When you're young, saving and investing aggressively can pay off because your money will have so much time to grow. Your earliest invested dollars are your most powerful. Imagine investing $6,000 per year from age 35 to 65, a total of 30 years. If it grows at the stock market's long-term annual average of close to 10%, you'll end up with almost $1.1 million. If you start doing that at age 45, though, just 10 years later, your money will have less time to grow. Over 20 years, it will barely top $375,000.
Let's return to our friends at Fidelity. They studied the millionaires among their 401(k) plan participants and found that their average savings rate over 12 years was about 14% of their pay. Yes, that might mean forgoing a few luxuries, like expensive headphones or leather trim in your new car, but it can also mean you'll get richer faster, and you might be able to retire earlier, too.
Dan Caplinger: Investment-related mistakes are common among 30-somethings, particularly because of the competing demands on limited available cash. Yet one of the primary reasons why so many young adults don't invest more is because they live above their means, spending money on nonessential purchases rather than prioritizing financial planning for their future.
Interestingly, some evidence suggests millennials are taking this advice to heart. A much smaller percentage of young adults own a car than in past generations, with many millennials relying on car-sharing services such as Zipcar or ride-sharing through Uber and similar services rather than taking on the burden of vehicle ownership. Similarly, homeownership rates are lower than in the past. Some of this is because many millennials don't have the money to spend on these things, having carried unusually large amounts of student loans and other debt they need to pay off before they can finance major purchases. For others, however, the ability to direct hard-earned money elsewhere is a positive.
Regardless of your age, saving more will make you more financially secure. In your 30s, the money you save can work much longer and turn into a much bigger boost to your nest egg than you'd imagine.
Jason Hall: One of the biggest mistakes people make when investing is, well, investing. What I mean is that they think they're investing, when they're actually trading. And way too much.
According to Dalbar's annual Quantitative Analysis of Investor Behavior, a study that has tracked the divergence of investor returns from market and fund returns for more than 20 years, individual investors tend to significantly underperform the funds in which they invest. Since the inception of the QAIB study in the late 1980s, the S&P 500 has averaged 11.11% in annual returns, while the average investor in equity funds that Dalbar measured averaged less than 4% in annual returns.
Yes, almost all mutual funds tend to underperform their benchmark, but not by so wide of a gap. According to the S&P Dow Jones Indices SPIVA report, 82% of large-cap mutual funds -- the largest group of stock-based funds -- underperformed the S&P 500. According to the most recent SPIVA report, which measured through the end of 2014, the average large-cap mutual fund underperformed the S&P 500 by 1.04% over the past 10 years, after fees.
In other words, investor activity -- active buying and selling -- results in measurable and significant underperformance for the average investor. Don't think a few percentage points can make a big difference? Think again.
It might feel like you need to do something to get the best returns. The reality is, though, that all you need to do is pick the best companies or index-based mutual funds, and get out of the way.
