Are you worried about the state of your retirement savings?
The vast majority of Americans are quite optimistic about their retirement savings. The Northwestern Mutual 2022 Planning & Progress Study showed that 23% of Americans feel pretty confident and 37% are somewhat optimistic that they will have enough money to live comfortably after retirement.
The thing is, sometimes automatic contributions made during your working years don’t provide enough retirement income to make ends meet.
According to a 2015 study made by the Transamerican Center for Retirement, it turns out that Americans in their 60s have an average savings of less than $200,000. Supposing that amount of money is going to last for thirty years, this means that these retirees will get less than $12,000 a year. Based on the Federal Poverty Level, this retirement income is just below it. Remember, this is the average.
To avoid running short on retirement savings — or even worse, unintentionally ruining your future retirement — make sure you break these bad habits.
1. Why Save for Later When You Can Spend Now?
According to certified financial planners, it’s far easier to focus on the present moment than to make plans for the future. After all, building a nest egg for retirement may not seem as urgent when bills are due. However, if you evaluate your spending carefully, you can come up with ways to eliminate unnecessary expenses so you can boost your retirement savings.
For instance, Erik C. Olson, a certified financial planner claims that you can actually save hundreds of dollars every month. Here are some ways to do that:
- Switching to a less expensive cellphone plan
- Eating out less
- Reducing the cost of cable TV — or ditching it.
- Paying off credit card debt.
“Perhaps you’re thinking that it wouldn’t be as much fun,” he explained. But think about how fun it would be to work your entire life because you cannot afford to retire. By starting to save early, you’ll have more time to achieve your financial goals.
“The money you save and invest in 10 years can grow to represent an important part of your retirement portfolio, even if you continue to save and invest for decades more,” explained Olson. “That’s the power of compounding growth.”
2. Underestimating the Amount You’ll Need to Retire
Perhaps you’re doing your best to control your spending so you can put some money aside for your golden years. However, your efforts may be ineffective if you haven’t set up your own retirement plan. By doing this, you’ll figure out how much money you’ll need to live a comfortable retirement.
“Nobody likes being caught off guard. To avoid this, seek advice from a qualified financial planner to have a plan in place and a better understanding.” Olson said.
But, if you can’t afford financial assistance, you can also use an online calculator — there are many to choose from — to get an idea of how much money you’ll need to save.
3. Only Investing in the Best-Performing Mutual Funds
According to Michael Hardy, certified financial planner and president at Ocean Wealth Group, a lot of folks choose the best-performing mutual fund in their 401(k) plan offered by employees, expecting that it continues to grow as it has before. You may think this is a reasonable strategy, but it’s not.
“What history has shown us is that the best-performing funds for retirement savings become the worst, while the worst will become the best,” he explained. You may feel optimistic now about maximizing your retirement savings by investing in a top-performing fund and find later that your nest egg is being threatened by a stock market crash.
Instead, if your retirement plan has a target-date fund available, you should go for it. These funds diversify your investments among bonds and stocks and become more conservative as you approach retirement.
4. Misunderstanding What Diversification Means
You’ve probably heard that diversifying your portfolio helps your retirement savings go further. So, as you plan your investment options, you may assume it would be a great idea to allocate your money across several best funds. Those funds, however, may come with an excellent track record since they were invested in the same type of bonds or stocks that had superior performance recently.
Olson advises that you keep a close eye on your portfolio so that you do not mistake concentration for diversification and end up ruining your whole retirement savings. What we mean by that is to make sure that if one fund starts tanking, the rest do not follow as well — leading to a portfolio meltdown.
That’s why when it comes to your retirement savings, it’s very important to do your homework by seeking advice from a retirement advisor and learning how to create a properly diversified portfolio that’s suitable for you.
5. Overreacting to Market Volatility
It’s pretty difficult to just watch and do nothing with your money — like taking them out of stocks — when a market crash affects your retirement savings. But that’s exactly the moment when you should put your emotions on hold.
If you’re watching CNBC and you are seeing the stocks plummet due to a market crash, you should not act rashly and follow your first instinct as it will be ruled by fear alone and not reason. Restraining yourself can mean that you get to save your retirement savings, as you cannot predict what will happen and the markets will go through periods of instability, but it does not mean that they will not come back.
Even if you’re nearing retirement, you must be patient. Having a rebalancing strategy and a good asset allocation in place would definitely work well in the long run.
History indicates that markets always recover, McLay states. So will your portfolio. It may mean that you’ll have to apply for a postponed retirement. However, this decision is preferable to cash out your retirement savings after they’ve taken a big hit.
If you are worried that you will not know what can happen with the market and the stocks, we recommend you read this book on Advanced Trading Strategies and Techniques, which you can find on Amazon!
6. Putting Contributions on Autopilot
You shouldn’t take money out of your retirement savings account when the market is crashing or only invest during better market days. Another thing you shouldn’t do is put your retirement contributions on autopilot, said Marguerita Cheng, CEO, and founder of Blue Ocean Global Wealth.
If your retirement savings plan doesn’t automatically raise your contribution amount each year, or you don’t increase it yourself, you may not be able to save enough for a decent retirement. Most experts suggest saving at least 10%-15% of your income annually.
If you’re unable to contribute that amount, ensure that you are saving enough through your 401(k) plan to have matching contributions from your employer. Then, as your income increases, set aside a bit more each year.
7. Not Factoring in Emergencies
If you focus on putting all of your savings into a retirement account but forget about setting aside for emergencies, you may be jeopardizing your retirement savings. You may think that it is never going to happen to you, but you must be prepared for any situation such as losing your job, having an unexpected expense, or the inability to work due to an accident or an illness.
What all these situations have in common is that you’ll be forced to withdraw money from your retirement account.
To prevent being caught off-guard, build your own rainy-day emergency fund to cover expected expenses, and get some insurance policies for the ones you can’t afford to cover. Not only will this help you get through the hard times, but it may also help to keep your retirement savings on track.
8. Spending Too Much Money on Your House and Car
Those who own a house and car are used to making payments on them. But there are also some folks that are willing to pay more than they can afford for a house or car. Do you find yourself in this situation? If so, you may not have room in your budget to set aside for retirement.
Cutting car and housing expenses by 25% will have a greater impact on your retirement savings than never buying another coffee or enjoying dinner in a fancy restaurant.
You may argue that a house you’ve paid for means having fewer expenses in retirement. This is somewhat true but think about the insurance, utilities, and upkeep costs that you’ll have to pay.
If you won’t have enough retirement savings, you may need to downsize to a less expensive house. Or change your high-priced vehicle for a used one. By doing this you’ll be able to increase your retirement contributions by the money you’ve saved on car and housing costs.
9. Paying for Your Children’s College Education
It’s pretty clear why parents are paying for their children’s college. They want to give them the greatest college education possible and it’s perfectly understandable.
However, many families overvalue the benefit of the more expensive schools while underestimating the harm to their retirement savings caused by either putting aside for these colleges or burdening themselves with massive student loans.
We understand the importance of saving for your child’s education, but make sure you don’t do it at the expense of your nest egg. If you can’t afford to put aside for both, keep in mind that there aren’t loans for retirement.
10. Making Only Pretax Retirement Contributions
Making pretax contributions to a 401(k), 403(b), or other similar plans provides an immediate tax benefit since it reduces your taxable income. Contributions to a traditional IRA can be tax-deductible as well.
This approach is apparently a smart move because you’re not paying taxes. This means you’d probably be able to contribute more. But in reality, things are not so. This approach misses the fact that the money you’ll withdraw in retirement will be taxed as ordinary income.
If you believe your tax bracket will boost by the time you reach full retirement age, Olson recommends investing in a Roth IRA. This retirement plan doesn’t provide an immediate tax break, but withdrawals in your golden years are tax-free.
However, you may be interested in knowing what retirement investments are going to be worth your time! For that, we recommend you read all about risk-free retirement investments here!