Planning for retirement is a stressful process for many people. While trying to figure out ways to maximize your savings, you need to project decades into the future and think about strategies for avoiding the common pitfalls. Unfortunately, no matter how much you plan, you are unlikely to do everything perfectly. However, you can minimize your regrets by paying close attention to what current retirees wish they had done differently. Pay close attention to the mistakes that people now retiring feel like they made, and you can avoid them.
A recent survey of retirees found that many people shared three common regrets, all of which are behaviors that are still common among people preparing for retirement. These three regrets are:
1. Dipping into retirement funds too early.
Saving for retirement is hard. For decades, you see money leaving your checking account without much to show for it. This can prove especially difficult to handle when you find yourself in a difficult financial situation. Dipping into the nest egg may seem like an easy solution, but it can cause problems down the line.
The real issue is that taking this money out of retirement accounts means you will need to save even more to make up for it, which may be impossible if your budget is already too tight. You will need to make up not just for the amount you took out, but also for the missed interest during the time it takes you to repay it. Because you are unable to do this, you may end up working additional years.
Part of the problem is the fact that you will need to pay taxes on the amount you take out of an IRA or 401k or 403B, and this is on top of the 10-percent penalty you face if you are under the age of 59 1/2. As a result, you may end up taking out much more than you intended to cover the extra expense.
You should always look at these early withdrawals as a last resort. Exhaust every other option, such as loans or delaying the expense to save, before you dip into retirement savings. Many 401k plans offer low cost loans. This also highlights the importance of having a robust emergency fund and repaying it as soon as possible whenever you use it.
2. Starting retirement accounts too late.
Another common regret is not starting a retirement account as soon as they entered the workforce. When we are in our 20s, retirement seems so far in the future that we may not think about it. Other financial priorities may seem much more pressing. The problem is that you then miss out on years of compounded interest, which ultimately makes your financial goals that much more difficult to achieve.
If you look at the ultimate size of someone’s retirement nest egg, the original cash contributions they made should be only a fraction of the account balance. This is because investment earnings will account for the majority of that amount. Through tax deferred compounding, you end up earning interest on interest, but it takes time to get to the levels needed for a secure retirement.
Starting late with saving may mean retiring late since your investments simply have less time to grow. The other issue is that starting to save later in life forces you to be more conservative. When you have decades before you retire, you can be aggressive since you have plenty of time to recover from losses. As retirement gets closer, you have less of an ability to recover and thus need to adopt a more conservative approach. This approach protects your money, but it also limits your money’s ability to grow.
3. Investing too conservatively when young.
Of course, you may find yourself in the situation of saving early but still adopting a relatively conservative approach to investing, which limits how much your money can grow. When you are young, the majority of your retirement savings should be invested in stocks. Even if your portfolio takes a massive hit during a downturn, you can wait it out and the market will eventually recover. In fact, if you are steadily adding to your retirement account through regular payroll deductions, a nasty bear market may be a blessing in disguise, as your ongoing fresh contributions will be buying more shares of depressed investments, and you will benefit more from the eventual recovery.
The important thing to keep in mind is that saving for retirement is a long-term game. Do not get scared and sell when your portfolio is low as that just locks in the loss. Instead hold onto your investments, stick to the plan you have established beforehand, keep adding new money even when you don’t want to, and watch your account balances recover over time.
Of course, you can always take on too much risk, which is arguably worse than being too conservative. With too much risk, you could end up losing your whole investment. While you can be aggressive when you are young, you still need to be smart about your approach. One rule of thumb that people use is to subtract their age from 110. The remaining number is the percentage of your nest egg that should be invested in stocks. In other words, as a 30-year-old, you should have 80 percent of your savings invested in stock. By the time you turn 40, that number should be down to 70 percent as you move some money into safer investments, such as bonds. If the thought of doing this math and rebalancing your account yourself seems overwhelming, you can always invest in a target date retirement account. These automatically adjust the percentage you have invested in various asset classes as you approach retirement.