6 Common Retirement Savings Mistakes to Avoid

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retirement mistakesSo 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.

RELATED: How to Budget Your Money With the 50/20/30 Rule

Retirement Planning

  • Bonnie

    I wonder about #1 – #3. I appreciate that seeing a number like $2 million might inspire some people, but it also has the opposite effect of feeling like there’s no hope so why bother. Estimating expenses and health care is also very difficult 20 – 40 years away and you end up with a very general ‘benchmark’ number that fluctuates wildly depending on which calculator / advisor you consult.

    I think I would make #1 – Think about when and how you want to retire. This makes people stop and think about what their expectations are and what their goals should be.

    I would make #2 – research the realistic costs – healthcare etc. of that plan in retirement

    #3 – consider whether you want to leave inheritance to children / family – even if that ‘inheritance’ is the gift of not being a financial burden to them in the last years of your life!

    My father was a financial planner and did myself and his three daughters and ENORMOUS favor by working out a trust – even given his modest retirement. While he worked part time until he was 80 and was graced with an old-fashioned pension, he also had 5 years of high medical and personal care costs in his final years.

    Fewer and fewer people just grasp their heart and fall over or have a terminal diagnosis that takes their life within weeks. Long, drawn out final years are becoming the norm.

    My point is, because of the variables, trying to figure out how much I ‘need’ in terms of a number just overwhelms me. But knowing all the possible scenarios helps me literally save as much as possible.

    Maybe other people know they want to ‘retire to Capri’ or ‘buy a beach house’. or ‘stop work at 55 and travel the world’, but I don’t. My goal is ‘never be a financial burden to my daughter’ knowing that I may live (given family history) well into my 90s.

  • eeyore_smiling

    That retirement calculator is horrible! It gave me a goal that is not accurate. The goal it gave me for my estimated retirement income is actually $500 a month OVER my monthly net pay. It’s supposed to be based on 85% of my current pay, so WTF?

    • CB

      You did notice that the retirement calculator adjusts for inflation and also assumes an annual pay raise of 3.5%, unless you change that number, right?