We all know how important saving for retirement is to secure a financial foundation in our golden years. A report by TD Ameritrade found that 28 percent of Americans in their sixties have less than $50,000. About two-thirds have less than $100,000 who are in their 40s. The likelihood that people who find themselves in these categories will face a financial problem in retirement is high. What can be done when planning for retirement to avoid this scenario?
Planning for Retirement
The sooner you get started with saving for retirement, the better off you will be. For example, if you started putting away 10 percent of your $40,000 salary at age 22, you’d have a $1.7 million nest egg at 65. (assuming a 3 percent match, no changes to salary or contribution). If you waited until you’re 32, then that amount changes to $780,000, which is less than half if you had started ten years earlier.
But even if you’re starting later, the important thing is that you have a plan. Doing nothing is the worst thing that you can do.
How to Start Saving for Retirement
Open up an individual retirement account (IRA) as soon as you can. There are three basic types:
Roth IRA - uses after-tax money
Traditional IRA - the money is tax-deductible
SEP IRA - intended for those who are self-employed
There are different rules and features for each of these accounts. Do some research to figure out which one is best for you.
Additionally, if your employer offers a 401(k) or 403 (b), be sure to take advantage of them. Contribute at least as much as your company matches if one is offered.
Retirement Plan Services
You may prefer that someone else handles your finances. Retirement planning services are great if you want guidance on reaching your financial goals or learn about bad debt management to avoid a retirement mistake.
Retirement Mistakes to Avoid
A financial problem usually stems from a mistake we’ve made in managing our retirement money. Here are some retirement mistakes to avoid below:
Withdrawing early from retirement accounts - Depending on the type of retirement account, you could get high taxes and penalties that will cost you big.
Not prioritizing retirement savings - Kitchen remodels, funding your child's education, and other important financial obligations. But you can’t let these things become your focus. Look for other alternatives like putting off a remodel for another year and have your child consider less expensive college options.
Not saving enough - Social Security is not going to be enough for most of us, even if it’s still around in the future. $1,471 was the average monthly retirement benefit from Social Security in June 2019. Instead of upgrading your toys or keeping up with the Jones, plow more money into savings. 10 to 15 percent of your income is ideal.
Watch out for fraud investment companies - If it sounds too good to be true, it probably is. Ponzi schemes are a type of fraud investment that we are probably familiar with due to the news. There isn’t a surefire to know whether an investment is fraudulent or not, but there are red flags to be aware of.
Retirement Mistake to Avoid: Bad Debt Management
A retirement mistake that is becoming more common is carrying debt into retirement. Getting rid of as much baggage as possible is a financial habit that should be a focus as you get closer to retirement. One of the best ways to do this is by using a budget.
This financial habit is emphasized by almost every professional. Find a type of budget that suits your lifestyle. 50/30/20, zero-based spending ceiling, and the anti-budget are just a few that are out there.
Can I Fix My Retirement Mistake?
If you’ve made a mistake, depending on what it is, you might be able to fix it. One of the common mistakes that people make is that they start saving late. Things that you could do if you’ve found yourself in these shoes include:
Take advantage of catch-up contributions available in tax-advantaged retirement funds.
Move to a state that has significantly lower living expenses if possible.
Adjust your retirement lifestyle accordingly
Work for a few more years or consider working part-time in retirement.
The solutions aren’t always going to be ideal, but they are better than the alternative of doing nothing at all. Financial planners are great resources to help provide retirement plan services if you want to consider what options you have.
About the Author
Anjana Paul is a banking professional who is passionate about helping others make better choices when it comes to money. In her spare time she is a freelance writer with years of expertise in the financial industry. She primarily writes about topics such as student loans, building credit, budgeting, retirement and other personal finance topics.