So you say you’re already contributing to a 401(k) or some other type of retirement account? Congratulations—you’re working on making your future self very happy. That’s because the secret to retirement savings is that you can’t make up for lost time.
And if you’re making progress, you want to make sure that you’re doing retirement right … right?
Knowing just how much to save is one of the hardest financial challenges there is. You might try a calculator, or talk to a financial planner to figure out your big picture.
And, in the meantime, you should avoid any little missteps that might put a crack in your nest egg. That’s why we asked several Certified Financial Planners™ to pinpoint six common pitfalls they see when it comes to saving and investing for retirement, and how you might avoid them.
1. Having No Clue How Much You Need to Save for Retirement
More than half of surveyed Americans (56%) say they haven’t even attempted to calculate how much they’ll need to save in order to live comfortably in retirement, according to the 2014 Retirement Confidence Survey conducted by the Employee Benefit Research Institute (EBRI). But in much the same way you should have a figure in mind when you’re saving for a car or house, knowing what your long-term retirement goal is can help you figure out a savings plan to help you reach it.
Seeing such a large number may feel overwhelming, but it could also light a fire under you too. “If you see you need $2 million for retirement, that could jump-start savings,” says Kevin O’Reilly, CFP® and principal of Foothills Financial Planning in Phoenix. Just remember that you do have compound growth to help you build your investment—and the younger you are, the more time is on your side.
Online retirement calculators, like this one can help give you an idea of the total amount you may need in retirement, based on factors like how much you have saved so far and various estimated expenses. Just be honest and meticulous when entering the information, or else it’s “Garbage in, garbage out,” cautions Erika Safran, CFP® and founder of Safran Wealth Advisors in New York City.
Many retirement calculators use a replacement ratio when doing their calculations, which is simply the percentage of your current income that you think you’ll need to have for retirement. An 85% replacement ratio is a good general rule of thumb to follow, but your number could be different depending on what your individual retirement goals are.