Saving for retirement is never easy, but as costs continue to rise, you may need to save more than ever. The average worker expects to need around $1.7 million to retire comfortably, according to a 2022 survey from Charles Schwab. Yet the median retirement account balance as of 2021 is only around $35,000, Vanguard found.
While there's not necessarily a right or wrong way to prepare for retirement, there are some strategies that work better than others. Unfortunately, there are also three common ways many people may be inadvertently hurting their long-term saving potential.
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1. Not investing aggressively enough
Investing in the stock market is inherently risky to some degree, and it can seem dangerous to put your life savings on the line. Sometimes, though, a more risk-averse approach can do more harm than good.
Asset allocation refers to how your investments are divided up within your portfolio. Most investors have a mix of stocks (more aggressive) and bonds (more conservative). While it may seem like investing more heavily in bonds is a safer approach, bonds generally earn lower returns than stocks. Over time, that can substantially reduce the amount you're able to save.
For example, say you're contributing $200 per month to your retirement fund. In scenario one, you're investing more aggressively and earning an 8% average annual return. In scenario two, you're only earning a 5% average annual return. Here's approximately how your total savings would add up in both situations:
| Number of Years | Total Savings: 8% Average Annual Return | Total Savings: 5% Average Annual Return |
|---|---|---|
| 10 | $35,000 | $30,000 |
| 20 | $110,000 | $79,000 |
| 30 | $272,000 | $159,000 |
| 40 | $622,000 | $290,000 |
Data source: Author's calculations via Investor.gov.
This isn't to say that you should only invest in stocks or that bonds are a bad investment. As you get closer to retirement, your portfolio should gradually shift toward the conservative side to better protect your savings against market volatility.
However, when you still have decades left to save, ensuring you're investing aggressively enough can help you earn hundreds of thousands of dollars more over time.
2. Not earning the full 401(k) match
If you're investing in a 401(k) and are fortunate enough to earn matching contributions from your employer, it's wise to take full advantage of them. The employer match is essentially free money and can double your savings with next-to-zero effort on your part.
Even if the employer match may not seem like much, it can add up over time. For example, say you're earning a salary of $50,000 per year and your employer will match up to 3% of that -- or $1,500 per year. If you're earning, say, an 8% average annual return on your investments, that $1,500 per year could add up to a whopping $389,000 after 40 years.
Keep in mind, too, that this figure only accounts for the money you're earning from the employer match. Once you add in your own contributions, you'd have at least double that amount in total, depending on how much you can afford to save.
3. Waiting too long to get started
When you're young and still have decades until retirement, it's tempting to put off saving -- especially if you already have a long list of other financial obligations.
However, time is your most valuable asset when it comes to saving, and the sooner you begin, the easier it will be. Thanks to compound earnings, your money will grow exponentially faster the longer it has to accumulate. When you start saving early, then, you won't need to invest each month to build a robust nest egg.
For instance, say you have a goal of saving $1 million for retirement, and you're earning an 8% average annual return on your investments. At that rate, here's how much you'd need to invest each month, depending on how many years you have before retirement:
| Number of Years | Amount Invested per Month | Total Savings |
|---|---|---|
| 20 | $1,900 | $1.043 million |
| 25 | $1,200 | $1.053 million |
| 30 | $750 | $1.020 million |
| 35 | $500 | $1.034 million |
| 40 | $350 | $1.088 million |
Data source: Author's calculations via Investor.gov.
The less time you have to save, the more you'll need to invest each month to reach your goal. But if you're already off to a late start, that doesn't mean it's impossible to save a lot for retirement. Starting now is always better than putting it off and will save you from falling further behind later in life.
Regardless of how much you already have saved or how much you can afford to invest, retirement preparation is tough. By avoiding these three mistakes, you can ensure you're not making it more challenging than it needs to be.
