Retirements Savings Mistakes Can Cost You
The perceptions of many Americans about being prepared for their retirement do not appear to match reality. According to the National Council on Aging, more than 23 million Americans age 60 or over are living at or below the federal poverty level. The Employee Benefit Research Institute notes that confidence about being prepared for retirement are at high levels even though savings levels are low. In fact, many Americans haven’t taken the most basic steps to save for their retirement.
To avoid becoming one of the millions of seniors living in poverty, it’s important to have a well-thought-out plan to save for retirement. Have you considered rising inflation rates and higher cost-of-living factors? Are you putting enough money aside during your working years? Ask yourself those questions as you consider some of the common savings mistakes that can make your retirement less than rosy.
You think Social Security will be enough to live on when you retire. Social Security is meant to be a supplement, not a primary means of financial support. According to the Social Security Administration, the average monthly benefit for retirees is $1,172. That amount alone will barely enable seniors to surpass the poverty line, and it may be inadequate to cover living and health care expenses.
You have little or no savings. Your risk of struggling and living in poverty during your later years is high if you haven’t adequately saved for your retirement. Even if you can’t put aside a lot of money, it’s important that you save a little every month. Compound interest will help even small sums of money grow significantly. Let’s say you save just $25 per month. In 40 years, at a 6% annual rate of return, your savings will have risen to nearly $50,000.
You put off saving. In the early days of your career, much of your paycheck may go toward paying your mortgage or student loan and credit card debt. But saving just $50 a month for retirement can really pay off. For example, if starting at age 25 you contribute $5,000 each year to your retirement fund — at a modest annual earnings rate of 6% — by the time you reach age 65, your account will be worth around $775,000. If you contribute the same amount at the same rate of return, but don’t start till you’re 45, you’ll only have about $183,000 saved when you hit 65. The golden years may be a long way off, but thinking of saving for retirement as a sprint rather than a marathon will cost you in the long run.
You only put money in a regular savings account. Once you’ve committed to save for your retirement, it’s important that your money grows to not only keep up with inflation, but to outpace it. A regular savings account isn’t likely to achieve that. You may want to diversify by putting some money in investment vehicles that include stocks or bonds, which have historically outperformed savings accounts over the long term. The U.S. Department of Labor advises people who have access to employer-sponsored 401k retirement plans to contribute to them. If that option is not open to you, consider investing in an individual retirement account (IRA).
It’s never too early —or too late — to save for your retirement. Your golden years will be not so golden without an adequate nest egg.