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3 Saving Strategies That Could Do You More Harm Than Good

By Katie Brockman - Jul 13, 2019 at 7:30AM

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You may think you're doing everything you can to save enough, but you may be unintentionally hurting your retirement.

Nearly everyone wants to save more money for retirement, but no matter how much you're earning, it's not easy.

Roughly a quarter of American households earning $150,000 per year or more are living paycheck to paycheck, a survey from Nielsen Global Consumer Insights found. A third of households earning between $50,000 and $100,000 per year are also struggling financially, as well as approximately half of those earning less than $50,000.

Part of the reason saving is so hard may be that you don't feel like you have enough cash left over after paying all your bills. But it's also possible you may be struggling because your saving strategies are working against you. By doing any of these three things, you may be hurting your savings more than you think.

Broken piggy bank with coins falling out

Image source: Getty Images.

1. Skipping an emergency fund

When money is tight and you're trying to save for the future, it's tempting to put all your spare cash straight toward your retirement fund. Congratulations for realizing the importance of saving now to reap the rewards later.

However, if you don't also have a solid emergency fund, you could unintentionally be putting those savings in jeopardy. Without an emergency fund, when an unexpected expense pops up -- whether your car breaks down, you lose your job, or your kid breaks an arm -- you'll have no choice but to pull the money from your retirement savings.

While establishing an emergency fund means you can't save as much for retirement in the short term, it ensures your savings can remain untouched so it can grow faster. Thanks to the power of compound interest, the longer your money is left alone, the more it will grow. If you're repeatedly withdrawing from your retirement account every time you're faced with an unexpected cost, it will only hurt your savings over the long run.

Depending on the type of retirement account you have, there may also be financial repercussions to withdrawing cash before retirement age. With traditional IRAs and 401(k)s, for example, you'll typically face a 10% penalty as well as income tax on any money you withdraw before the age of 59 1/2. So not only are you hurting your money's growth potential by withdrawing it early, but you'll also end up paying more than you expected just to access that cash.

2. Prioritizing saving over paying down debt

Saving for retirement should be one of your biggest financial priorities, but it's still important to look at the big picture and see where your money would have the biggest impact. If you're saddled with loads of high-interest debt, you could end up paying thousands of dollars in interest alone. And if you focus all your efforts on saving instead of paying down that debt, you could end up paying more in interest than you're earning on your investments.

This isn't to say you shouldn't save at all while you're paying down debt. Wait too long to start saving for retirement, and it will be nearly impossible to catch up. But look at all your forms of debt to see which ones are doing the most harm, and work on paying those down first so you can ultimately save more for retirement.

Focus first on the debt with the highest interest rates. Credit card debt typically falls into this category, with interest rates anywhere from around 16% to over 20% per year. If you're paying 20% in interest on credit card debt while only earning a 7% annual return on your retirement savings, you may actually be paying more than you're earning.

If so, you may still want to contribute some money each month to your retirement fund, but focus the majority of your efforts on paying down the high-interest debt. Once that's paid off, you can continue putting the rest of your cash toward your retirement fund. You'll still need to make at least the minimum payments on your other types of debt, of course, but lower-interest debt isn't as toxic as credit card debt -- and if you wait until you're completely debt-free before you start saving, you'll likely run out of time to save enough for retirement.

3. Saving just enough in your 401(k) to earn the employer match

Employer-matching 401(k) contributions are essentially free money, so it's smart to contribute enough to your retirement account to earn the full match. But contributing only enough to earn the full match may lead to a false sense of security, leading you to think you're saving enough when you really should be saving more.

The average employer contribution amount is around 4% of your salary, according to a study from Vanguard. So if you're contributing 4% and your employer matches that, you're saving a total of 8% of your income each year. But you may need to save at least twice that much to ensure you're adequately prepared for retirement.

Those who started saving at age 25 and expect to retire at age 65 should aim to save 10% to 17% of their salary each year, according to a study from the Stanford Center on Longevity. If you wait until 35 to start saving, you need to contribute around 15% to 20% of your income to retire comfortably at 65. And by delaying saving until 45, you have to sock away roughly 25% to 27% of your salary each year.

So if you're saving 8% of your salary when you really should be saving, say, 20% to meet your retirement needs, you may be off track without realizing it. While earning the full employer match is important, don't use that as a benchmark to determine whether you're saving enough.

Saving for retirement isn't easy, and these common saving mistakes may be making it harder. 

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