With so many financial decisions and choices out there, however, it can be hard to decide what route to take when saving for retirement.
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As a result, many people make mistakes along the way.
In this article, we’ll discuss some of people’s most common retirement savings mistakes and how to avoid them.
Whether you’re just getting started or have been managing your finances for a while now, take a few minutes to read through these tips, as they could save you from costly errors down the road!
#1. Delaying Retirement Contributions
The longer you wait to contribute to your retirement accounts, the less time your investments have to compound, resulting in a smaller retirement nest egg.
This means you need to save more money every month to have the same amount saved when you retire.
For example, if you save $200 a month for 30 years and earn 8% annually, you end up with close to $300,000 in savings.
But if you wait until you are 50 and only save that amount for 15 years, you end up with a little more than $70,000. To have close to $300K in 15 years, you need to save over $800 a month.
Also, delaying contributions means you miss out on employer-matching contributions, which can significantly boost your retirement savings.
This free money is one of the best reasons to contribute to your 401k plan in the first place.
#2. Stopping Retirement Contributions
Stopping saving for retirement can be just as costly as waiting to save. The good news, however, is if you have been saving for many years already, the impact won’t be as significant.
But any time you stop saving, you are costing yourself money. And what many people don’t realize is once you stop, it is hard to start back up again.
You might think you will pause your contributions for a few years while you pay for that new car.
But once you pay off the car, you will likely find another use for your money and not start putting it towards retirement.
A better solution would be to cut back, not cut off. Of course, the ideal scenario is to find another way to pay for what you need and not touch your contributions.
#3. Not Putting Money Into A Roth IRA
A Roth IRA is arguably one of the best ways to save for retirement. This is because your money grows tax-free.
Your money grows tax-deferred with a 401k plan or a traditional IRA. This means you only owe taxes on the money once you take it out of the account.
With a Roth IRA, there are zero taxes when you take the money out.
Also, with a 401k or traditional IRA, you are legally required to take the money out of the account once you reach a certain age.
This is because the government wants their money. But there is no requirement for a Roth.
#4. Taking Social Security Early
After working many years and paying into the system, it can be tempting to start drawing from your Social Security benefit as soon as possible.
But this can have a significant impact on your future finances.
If you were born before 1960, taking Social Security early means you get 25%-30% less per month for the rest of your life than waiting until retirement age.
This also means when benefits increase for cost of living adjustments, your increase will be 25-30% less.
Ideally, you wait until full retirement age to take benefits to not cost yourself a small fortune.
#5. Overpaying For Medical Care
The world of medical insurance is complicated, and sadly, seniors often overpay for care simply because they do not know what coverages are out there.
The best thing you can do is talk to a Medicare expert who can guide you through the jargon to get you the best plan for your needs.
13 Eye Opening Habits of Wealthy People You Need Have
Live Within Your Means
If you have to go into debt to buy something, you cannot afford it. Granted, a house and a college education are exceptions, within reason, of course.
But you should not be going into debt for things like clothing, gifts, flat-screen TVs, etc.
You need to keep your living expenses in line with your income. In other words, don’t spend money you don’t have.
According to studies, the wealthiest people save between 20% and 40% of their income. The top 10% of wealthy people save between 10% and 30% of their income.
The rest save between 0% and 5% of their income.
In other words, rich people make it a point to save their money. Almost every poor person who is struggling financially spends more than they earn.
And by not saving anything, you will never get ahead financially.
If you don’t save, your life today will be the same in 20 years.
And if you spend more than you earn, you’ll be in even worse financial shape in 20 years than you are today.
Make it a point to save money every single month. Don’t worry about the amount at this point. Right now, just make it a habit to start saving.
Set up a reminder in six months to increase the amount you save by $20 a month. Then set up another reminder once a year, every year, to increase this amount by at least 1% until you are saving 15% of your income.
I gamble, but I don’t gamble. What I mean by this is that I participate in a weekly football pool picking the winners of each week’s games.
I also will spend $100 on slots and blackjack when my wife and I or my friends and I head to Atlantic City. And sometimes, when the Powerball lottery gets to $500 million, I’ll blow $20 and play.
The keys here are:
Develop Good Money Habits
Wealthy people become rich and successful because they are smart with their money.
Looking back on the point above about not gambling, if poor people win the lottery, there is a high chance they will end up broke in a few short years.
Wealthy people who win the lottery will not end up broke.
One reason for this is that wealthy individuals have good money habits. They aren’t going to make dumb decisions with their money.
They save and invest the majority of it and spend the rest. These millionaire habits extend to all areas of personal finance too.
They take advantage of tax planning, so they pay as little in taxes as possible.
They are smart when they borrow money, only borrowing what they need.
And since they have good credit, the interest rates they pay are low.
Work hard to learn the basics of personal finance and apply rich people habits daily. In time you will see an improvement in your wealth.
One reason is probably that they are out of the house more. Not necessarily working, but networking and participating in groups, seminars, industry events, and volunteering.
Also, they tend to read more, leaving them little time for too much TV watching.
The wealthiest people watch 2 hours or less of television daily.
The trick I found to help me watch less television is to DVR the shows I am interested in.
Instead of watching the shows while they are airing, I do projects around the house, read, or spend time with my family.
Then I check out the DVR every once in a while and will watch some of the shows. I find that most times, I delete the majority of things I recorded and never watch them in the first place.
Stay Off Social Media
Have you noticed how the country seems at odds with all the issues we have right now, like never before?
I’m not here to say who is right and who is wrong. But I will tell you why I think things are like this.
The reason is social media. And the sooner you can kick this habit, the better off you will be.
Here is why. Think about talking to someone in person.
You not only see them, but you see their facial expressions. Since the majority of language is non-verbal, this is critical.
You also can understand the tone of their voice. Put these two things together, and you better understand where they are coming from when having a conversation.
Now have the same conversion online, and you are lost. You have no idea when they are serious or joking.
The other big issue with social media is you get to hide behind a screen.
Most people wouldn’t say mean or hurtful things to another person if that person were standing in front of them.
The point here is that you need to stay off social media. You quickly get sucked in you lose hours of your day.
Studies show that poor people eat the second most amount of junk food. The middle class eats the most.
What does the food you eat have to do with building wealth? A lot more than you think.
When most of your diet is built around junk food calories and drinking too much alcohol and soda, your body is not working for optimal performance.
It is trying to rid itself of the junk and survive on the little good stuff you are putting into it.
It’s like being in a bad relationship. It sometimes feels good, but it feels terrible a lot of time too.
When you eat bad food, you can’t focus or concentrate and don’t have the energy you should.
Your sleep is poor, making you tired the next day.
When this happens, you are prone to giving into poor habits and making bad decisions.
When you eat healthy food, your body performs better, and you sleep better, which results in more willpower and better decisions.
You need to start a healthy eating routine so you can perform better.
Don’t think you can never eat junk food again. Rather limit it.
Pick one day a week to eat junk food and eat healthy the rest of the week.
You’ll quickly notice your lack of energy and drive the day after which you eat poorly.
Start Your Day Off Right
While most wealthy people wake up on the early side, usually around 5 am, you don’t have to.
What you do have to do is start your day the right way. Why do rich people wake up so early?
There are various reasons, including:
Control Your Emotions
Most of us get ourselves into trouble when we say something at a time when we are highly emotional.
If you take five minutes right now, you can think of a few such times. Before you say what is on your mind, take a step back and think things through.
Chances are you will be thankful you didn’t say what you thought.
Why is it important to control what you say? You never know what will come back to haunt you. It’s as simple as that.
So while you may want to tell your boss who is letting you go where to stick it, you are better off biting your tongue.
You never know when you might need a reference for a future job. Another emotion that separates rich people from poor people is fear.
Wealthy people lean into their fear and build self-confidence. This confidence gives them the courage to keep pushing forward.
On the other hand, the poor give into their fear and never build their confidence.
This causes them to get stuck in their situation and never improve.
If you can learn to think before you speak and lean into fear, you will see a monumental shift for the better.
Network And Volunteer Regularly
Of all the rich habits, this one has the greatest payback.
Over 66% of wealthy people network and volunteer their time, and another 78% take part in charitable giving, according to studies.
Why is volunteering important? There are a few reasons:
Use Long Term Thinking
The way you think has a significant impact on your financial success.
For example, rich people think long term. Before they buy something or do something, they take the time to figure out the long-term benefits and consequences.
The poor think in the short term. They give into emotions and don’t fully understand the long term effect of their actions.
Here is an example to help you better understand this.
A poor person will walk into a car dealership and tell the salesperson they can afford a monthly payment of $500.
An intelligent salesperson can work the numbers out, like the length of the loan and interest rate, to get you into a $40,000 car for $500 a month.
This sounds great. But when you factor in how long you will be paying for the car, your total cost is over $45,000.
This might not sound bad. But a rich person will walk in and say they will pay $30,000 for a car and buy the vehicle that fits this budget.
In the end, the rich person paid $15,000 less for a car. They can now take this money and invest in growing into more money. Or they can use it when an opportunity comes their way.
The goal for you is to look at the long term impact of things before you do anything. The more you can do this, the better off you will be.
Avoid Toxic People
You are the company you keep.
This means that if you hang out with troublemakers, you too will most likely become a troublemaker.
You need to sit down and look over all of your relationships and cut out or limit those relationships that don’t improve your life.
If you have toxic friends, it can be easy to cut them out. Stop calling and texting them and do something else.
But with family, it isn’t so simple. While you might not want to cut them out completely, you can limit your time with them. Only see them during the holidays or special events. Don’t get sucked into their stories when you are around them.
In other words, come up with a reason why you need to leave. If you can’t leave, have a reminder on your phone.
This reminder should be a note of all the good you have and what goals you are striving for. Doing this will help you wash away the negativity affecting you when talking to these people.
It is so vital that you go through this process if you want to become wealthy and successful.
Studies show outside influences, such as the people in our inner circle, impact us.
Don’t Give Up
Let me break it to you. You are going to fail. You will fail a lot.
For many of us, we see failure as a bad thing. We think of failure as getting a bad grade or not being good enough.
When you fail, you are trying something new and growing as a person. You are trying to be the best you that you can be.
There will be times when you stumble and fall, and this is OK.
Take a few minutes, think about why you failed, and try again.
You tried again after falling off your bike, didn’t you? And again, when you failed your driver’s test? This failure is just another bump in the road.
Look back on what you did wrong and make adjustments and try again. Odds are you will see success if you can objectively look at what went wrong and work on correcting it.
Learn from your mistakes and stop looking at failure as a bad thing.
And if you need motivation, look at this CV of failures published by Johannes Haushofer, a a psychology professor at Princeton.
“Most of what I try fails, but these failures are often invisible, while the successes are visible. I have noticed that this sometimes gives others the impression that most things work out for me. As a result, they are more likely to attribute their own failures to themselves, rather than the fact that the world is stochastic, applications are crapshoots, and selection committees and referees have bad days.”
Remember that failing is a part of personal growth and is a good thing, as long as you take the time to learn from it. When you fail, figure out what went wrong and try again until you get it right.
By changing your mindset on failing, you can see tremendous personal growth.
I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.
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But don’t just ask for advice from anyone. Talk to friends and family to see if they know anyone. Reach out to local support groups to see if they have referrals.
When you find someone, take your child with you or someone else to help you understand what the person is saying to make sure it makes sense for you and your needs.
As parents, you want to help your children as much as possible. But some people go overboard and put their children first line.
Making them a priority when you are behind on retirement is a recipe for disaster.
This is because you will struggle financially when it comes time to retire. In the worst case, you have so little money that your children will have to help support you.
Now they have the added stress of ensuring you are well cared for.
#7. Doing Major Home Renovations
If your retirement savings are healthy and you don’t need to go into debt, home renovations can be a great way to improve your home. But if you are going into debt, this could spell disaster.
The reason is that you won’t have money coming in during your retirement years.
So not only are you relying on your savings to pay for things, but you now have the debt you must also repay, depleting your nest egg faster.
#8. Not Doing Any Tax Planning
Taxes can have a significant impact on your financial future. Because of this, it is critical you do some tax planning.
This will ensure you are contributing to the proper accounts, investing in the correct vehicles, and keeping as much money as you legally can.
While using a tax professional will cost you money, the money you save will more than offset this cost over the years.
The final mistake many people make is not estimating how much retirement will cost and how long you will be retired.
There is an assumption that your spending will drastically decrease once you retire.
While you won’t spend money on clothes for work and other work-related things, you might spend more on eating out. Or you might pick up a new hobby.
While spending might decrease, there is a high likelihood it won’t drop by as much as you think.
Also, because of medical advances, more and more people are living longer. You might think that you are good if you have savings to last you until age 90.
But what happens if you live until 95 or 100? The last thing you want to do is run out of money and still have 5-10 years to live. At this age, returning to work is not an option, so how will you afford to live?
