Successfully saving enough for retirement is challenging under the best of circumstances. That's why it's so important to avoid major mistakes. Unfortunately, there's a lot that could go wrong, from picking the wrong asset allocation to choosing investments with high fees that eat away at your returns.
The biggest mistake, however, is a very common one, and it could make it extremely difficult to accomplish your retirement savings goals. Here's what it is.
This is the single biggest mistake that could derail your retirement plans
When it comes to errors that affect your ability to build a secure future for your later years, the biggest mistake you could make is waiting too long to start saving. This error can be an incredibly costly one that's impossible to correct. While you can change course on your asset allocation or switch up your investment strategies , you can't go back in time and start investing sooner.
Sadly, waiting even a short time to begin putting aside money is a huge mistake because it has an outsized effect on the amount of money you'll end up with. That's because any delay reduces the amount of compound interest you can earn, and compound interest is one of the key tools that enables you to build wealth.
Compounding is sometimes referred to as the eighth wonder of the world, and with good reason. Here's how it works. When you invest money, it earns a return that can be reinvested. You'll then earn a return on the return, so the amount you make grows exponentially. Think of a snowball rolling down a hill -- it starts small, but the bigger it gets, the more added snow it picks up with each roll.
Compound interest has that same effect on your money. You can begin investing a small amount, and your returns will help that balance grow bigger. And the bigger it gets, the more it'll grow and the faster it will grow. However, you need to get the process started ASAP so your money can start going to work for you. Even a small delay means many fewer revolutions of your snowball, which means you have to start with a lot more snow (money) to end up in the same place.
How much does delaying the start of your retirement savings cost you?
To understand just how costly an error it is to wait to start saving for retirement, consider the chart below showing the annual amount you'd need to invest to end up with a $1 million nest egg by the age of 65, depending on the age when you start your benefits and assuming you earn an 8% average annual return.
As you can see, waiting even five years adds more than $1,000 onto the annual amount you need to invest to hit your $1 million target. And waiting a decade can more than double the amount you'll need to save. While investing $2,396 a year should be eminently doable, investing more than $20,000 just isn't within reach in the majority of situations.
Don't wait any longer to start saving
If you're already on the upper end of this chart because you're in your 30s or 40s, you're definitely going to have to work harder if you want to end up a millionaire retiree than you would if you'd started in your 20s. But while failing to start investing sooner is a mistake, it's not an error you have to keep making.
You can, and should, start investing today so you can get compound interest working on your behalf. Get your snowball rolling now to amass the retirement nest egg you need to have the financial security you deserve.