Planning for retirement can seem confusing and complicated, so it's not surprising that two-thirds of retirees say they have regrets about how they prepared for it, according to a Clever Real Estate survey. More worrisome is the fact that many of today's workers continue to do the same things the retirees wish they hadn't.
If your goal is to retire comfortably, you should make every effort to avoid the following behaviors.
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1. Waiting too long to start saving
Nearly half of all retirees surveyed said they regretted waiting so long to begin saving for retirement. When you're young, other priorities can seem more pressing than retirement, which could be 30 years or 40 years away. But many people don't realize they're actually making their goals more difficult by putting off retirement savings.
Ideally, our personal retirement contributions, which we set aside out of our paychecks, make up a small fraction of our total nest egg in retirement. The bulk of our life's savings should come from investment earnings, which we get from investing our personal contributions in stocks that we later sell for a profit.
Typically, if you've invested wisely, you'll end up with more earnings by holding on to your investments longer. If you only hold them for a short time, they have less opportunity to grow. In particular, stocks can be volatile in the short term, which is why it usually only makes sense to invest in them if you don't plan to spend the money within the next five to seven years.
Delaying retirement savings often means settling for less earnings. As a result, you must make up the difference with additional personal contributions, and that costs you in the long run.
For example, if your goal was to save $1 million by 65 and you expected to earn a 7% average annual rate of return on your money, you'd only need to save about $403 per month if you began saving at 25. But if you waited until 30 to start contributing to your retirement account, you'd now have to save $582 per month, or a little over $75,000 more of your own money during your working years.
2. Investing too conservatively in their youth
About a third of the retirees Clever surveyed said they wish they'd invested more in high-risk/high-reward investments, like stocks, while they were younger. This makes sense because when you're young, you can afford to take more risk.
If your investments do poorly in the short term, that's not always a big deal because you may not need to use that money right now. Often, your stocks will recover in time, and you'll earn a profit over the long term.
Investing too conservatively isn't as bad as taking too much risk, but just like putting off retirement savings, it forces you to set aside more money for retirement because you can't count upon earnings as much.
A simple rule of thumb is to invest 110 minus your age in stocks. So that's 80% in stocks for a 30-year-old and 70% for a 40-year-old. You gradually move your money into safer investments, like bonds, a little at a time to help protect what you have.
3. Dipping into retirement funds
Tapping into your retirement savings early may ease some short-term financial problems, but it can create much bigger headaches over the long term. You'll have to save more money going forward to get back on track, which can be challenging if your budget is tight.
Plus, you'll have to pay taxes on your withdrawals from tax-deferred retirement accounts, like 401(k)s and traditional IRAs. And you'll face a 10% early withdrawal penalty if you're under 59 1/2.
Whenever possible, consider other ways to get the cash you need, like taking out a loan or saving up for a purchase. Build up an emergency fund as well so you don't have to tap your retirement savings for unexpected costs.
This isn't a comprehensive list of retirement mistakes, but if you can avoid them, you're off to a pretty good start. Remember to review your retirement plan annually as well to track your progress toward your goal and identify opportunities to grow your savings more quickly. It doesn't have to take long, and you definitely won't regret making the time for it.
