Planning and saving for retirement are among the most important aspects of personal finance. After working hard for the majority of adult life, most look forward to winding down and enjoying a comfortable lifestyle during retirement. While more people are aware of the importance of saving ahead for your retirement, there are still two general mistakes that can be costly down the road:
1. Not saving early enough
Many young people don’t give much thought to saving for retirement, especially if they’re earning a modest paycheck and having to prioritize immediate financial needs. But timing has a big impact on how much you need to contribute to your retirement savings: Assuming a hypothetical interest rate of 8% and a goal of one million dollars saved by the age of 65, you will need to deposit $189.59 every month if you start at 20, compared to $435.94 if you start at 30!
In short: When it comes to retirement planning, save early. We recommend looking into your company’s benefits and 401(k) plan at the very beginning of your first full-time job (learn some basics of benefits and 401(k)) plans here).
2. Saving by income, not goal
It’s easy to take the approach of putting a certain percentage of your income toward retirement savings, just as you do with your emergency fund. But unlike an emergency which might happen and would require a portion of your reserved money, you will have to retire and the money to support yourself without a job will be much more substantial. Considering the general retirement age in the U.S. is late 60s compared to the often much longer life expectancy, you can have 20-30 years of life that you need to plan for, plus the rising healthcare costs along the way. You don’t want to be caught in the stressful situation of not having the financial backings to support your lifestyle at old age.
This is why retirement planning should be a backward process. Start first with the question: How do I want to live my retirement?
Saving for retirement is a long process – but critical to your life during retirement.
Have you or someone you know made one of both of these mistakes while saving for retirement? What other insights do you have for effective retirement planning?