Retirement planning can be really complicated, which is a problem because the stakes are high. In fact, the only thing worse than hitting retirement age and finding you have too little saved is actually retiring and running out of cash once you've left the workforce.
If you don't want either of these two outcomes to be your reality, it's important to avoid mistakes throughout your career that could leave you ill prepared for your later years in life. In particular, there are four big errors you simply can't afford to make.
1. Waiting too long to start saving
When you start investing money early for your retirement, small investments go a long way. That's because you have ample time for your money to realize the magic of compound interest. Unfortunately, if you delay the day you start saving for retirement, you'll need to put aside much more cash to end up in the same place.
Assuming an average 7% annual return on your investment, here's how much you'd have to save each year to end up with $1 million by age 65, depending on what age you start investing:
- Age 20: $3,500
- Age 30: $7,250
- Age 40: $15,850
- Age 50: $39,900
Saving $3,500 a year from age 20 on sounds a lot more doable than coming up with close to $40,000 a year to invest for retirement in your 50s.
2. Saving too little
Another big mistake that could cost you is if you set your sights too low when it comes to retirement savings.
Experts traditionally advised saving around 10% of your income, however, that's no longer nearly enough for most people. In fact, depending when you start saving, you could end up being tens of thousands of dollars short of the income you need in retirement.
To make sure you save enough, set a retirement savings goal you're sure will give you sufficient income as a retiree, then automate your retirement account contributions to ensure you stick to it.
3. Over-relying on Social Security
Most people think Social Security will be a major source of retirement income. While chances are you'll need these benefits to help you make ends meet, you shouldn't expect them to be your sole -- or even primary -- source of retirement income.
Social Security is meant to replace only 40% of your pre-retirement earnings. If you count too much on your benefits to support you, there's a greater chance you'll be poor in retirement. The problem is compounded when you end up claiming your benefits early, thus reducing the income your benefits will provide.
Ideally, you'll set your retirement savings target with the goal of having enough income from investments to support you, making Social Security a bonus. If that's not feasible, assume you'll get a lower benefit than you expect and that most of your income must come from your savings, not the government.
4. Not understanding how your Social Security benefits work
Finally, if you don't understand the factors that can shrink your benefits or reduce spousal benefits, you could end up getting much smaller Social Security checks and less lifetime income -- and could potentially leave your spouse in the lurch after you're gone.
You don't have to make these retirement mistakes
Knowledge is half the battle when it comes to making retirement plans, and you now know why these four mistakes will undermine your efforts to enjoy life in your later years.
By saving early, setting aggressive retirement savings goals, not depending on Social Security more than you should, and making certain you understand how your benefits work, you can set yourself up for the secure retirement you deserve.