With Social Security only replacing a fraction of income, and pensions a rarity, it’s up to each of us to build our own retirement. However, mistakes are the potholes on the long road to retirement. And while the vast majority of those mistakes are little more than minor speed bumps, sometimes they can create a lot of burdens, and make it much harder to reach the finish line than you thought it would.
We asked three of our retirement and investment planning contributors to weigh in on the topic of retirement mistakes — particularly ones that people need to stop making today — and here’s what they had to say.
Putting it off hurts more than you realize
Selena Maranjian: One of the worst mistakes many people make regarding retirement is putting off preparing for it. You might, of course, be contributing some money into a 401(k) account at work, but if you’re just assuming that that plus Social Security will carry you through your golden years, think again. You need to develop a retirement plan, and then execute it — ideally beginning today, or very soon. When it comes to saving and investing, procrastination can be surprisingly costly.
To understand just how costly, imagine that you plan to sock away $8,000 per year for 20 years, in order to fund your retirement, and you expect to earn an average annual return of 8%. What happens if you put it off and start this investing in earnest two years late?
Well, if you sock away $8,000 annually for 18 years, and it grows by 8% annually, you’ll end up with around $323,570. What if you didn’t procrastinate and followed your plan for a full 20 years? Then you’d end up with $395,383 — more than $70,000 more dollars! Note, too, that you end up with more than 70,000 extra dollars just by having made two extra $8,000 investments, or $16,000.
The earliest dollars you invest have the most time to grow, and can grow the most. By putting off saving aggressively for retirement, you’re leaving many thousands of dollars on the table.
Be sure to spend the time to figure out how much you will need in retirement, and how you will amass that sum. If you start saving and investing effectively — such as in inexpensive, broad-market stock index funds — while you’re still young, it won’t be too painful. If you put it off until your 40s or 50s, you’ll probably be needing to save much bigger sums.