If you're saving regularly for retirement, you're better off than a lot of people. But savings alone isn't always enough to ensure a comfortable future. You also need the right strategies to help you set appropriate goals and grow your wealth as quickly as possible. And you have to avoid mistakes that could cost you money.
There's no such thing as an exhaustive list of retirement planning mistakes. But here are five of the most common to keep on your radar.
Image source: Getty Images.
1. Choosing a random savings target
For many years, $1 million was considered the gold standard of retirement savings. But aiming for a round number like this could land you in a lot of trouble today. Some people may be able to survive for 20 to 30 years on that sum, but there are many others who will need more. This includes people who expect to spend more than average, those with serious health issues, and those who live long lives.
You need to build a retirement savings plan based on your life expectancy and estimated annual expenses if you want to reduce your risk of running out of savings prematurely. Start by thinking about how long you expect your retirement to last and how your expenses might change between now and then. Don't forget to budget for things like healthcare and taxes too.
2. Assuming Social Security will cover most of your costs
Social Security will be around for you, whether you're retiring this year or decades from now. But it's probably never going to be enough to live comfortably on. For starters, it was never designed to be a senior's sole source of retirement income. And it's facing a funding crisis that could lead to benefit cuts within the next decade if the government doesn't make some changes to the program.
You can estimate how much you'll get from Social Security based on your work history by creating a my Social Security account. If you want to be extra safe, plan for about 20% to 25% less than what it says there, just in case of benefit cuts. Keep in mind that your claiming age affects the size of your checks, so you may want to weigh a few options before deciding which one is best for you.
3. Skipping your 401(k) match
Claiming your 401(k) match should be your top priority each year unless you absolutely cannot afford to do so. If you skip it, you're giving up hundreds or thousands of dollars you could've put toward your future. Had you claimed your match and invested it, that money may have grown into enough to cover your retirement costs for a year or two.
Talk to your employer if you're unsure whether your company offers a match or how its matching formula works. Then figure out how much you have to contribute yourself to get the full match. Divide this by the number of pay periods left in the year to figure out how much to set aside per check.
4. Cashing out retirement accounts
Early retirement withdrawals generally aren't worth it because they come with costly penalties. In most cases, you'll pay a 10% early withdrawal penalty if you're under 59 1/2, plus taxes if the money came from a tax-deferred account, like a traditional IRA or 401(k). Even if you don't owe this, you're still slowing the growth of your savings. You'll have to set aside even more going forward if you hope to retire on your original schedule.
Whenever possible, save for emergencies and planned upcoming expenses in a savings account so you don't have to tap your retirement savings. And if you have no other choice but to make an early withdrawal, come up with a plan to get your retirement savings back on track or delay retirement to give yourself more time to save.
5. Putting it off
Retirement planning isn't something most people would consider fun, and it can definitely feel overwhelming when there are so many unknowns involved. But putting it off is only going to make things worse. The sooner you begin planning and saving for retirement, the easier your job will be. If you wait, you won't be able to count on as much investment earnings, and you'll have to save even more to cover your retirement costs.
It can seem complicated at first, but if you avoid the five mistakes listed above, you should be off to a great start. Just remember to check in with yourself at least annually and alter your retirement plan as necessary to keep yourself on track.
