How is this pension fund doing?
If you’re like a lot of hard-working people, you might be wondering if you’ll have enough spare cash to avoid spending your last few years living on ramen noodles.
According to the 2022 Retirement Confidence Survey prepared by the Employee Benefit Research Institute, only 28% of respondents said they were “very confident” that they had enough money for a comfortable retirement.
The reasons why workers are not more confident about their retirement savings vary. But if you make these mistakes, you are virtually guaranteed to be poor in retirement.
1. Follow the Joneses
You can’t spend your whole life pretending to be rich and then think you’ll be rich when you retire.
Living within your means isn’t always glamorous, but it’s smart. And being smart is what will make you a rich retiree.
Rather than updating your smartphone every two years and your car every three, try to stick with what you have. It doesn’t matter if all your friends are renovating their kitchens: if yours is working perfectly well, leave it alone.
Having a realistic budget is the first step to living within your means. For more details, see “8 secrets to budgeting that works”.
2. Not saving enough money
When you’re not spending money on constantly upgrading your toys, you’ll have more money to save.
With traditional pensions nearly extinct, it’s up to you — and you alone — to save the money needed to live comfortably in retirement. Don’t count on Social Security for that either. The average monthly Social Security retirement benefit was just $1,555 in 2021.
Not saving enough money is a sure way to retire poor. Ideally, 10-15% of your earnings should go into a retirement account each month. If you’re behind on funding your savings goals, you should probably save even more.
3. Making savings priorities wrong
On the other hand, you can save money, but your priorities are all wrong.
Yes, college for kids is important, but not at the expense of your retirement account. Children can still get scholarships, jobs or even loans if absolutely necessary.
Make your retirement savings a top priority. Again, set aside 10% to 15% of your income in retirement accounts. That might seem like a lot of money to save each month, but that’s why you don’t follow the Joneses, right?
4. Save money on bad accounts
Another common mistake is putting retirement money in the wrong accounts. A typical savings account will not suffice.
Instead, put that money into tax-efficient retirement accounts such as 401(k) plans or Individual Retirement Accounts (IRAs). These accounts come with tax advantages as well as hefty penalties for early withdrawals. Avoiding these early withdrawals is a key part of ensuring your savings are still there when you retire.
And of course, if your employer offers a 401(k) match, put your retirement savings first. You’d be foolish to pass up that free money.
5. Finance everything
Today, retailers make it easy to buy everything from furniture to cars on a payment plan. However, you will never have money to save for your retirement if you finance every purchase.
Rather than spending money on interest, exercise self-discipline and wait until you have enough money aside before buying things. If you don’t go into debt, you’ll be amazed at how far you can stretch your paychecks. Then you can live comfortably now and cash in enough to live comfortably in the future.
6. Drop your credit score
If you need to finance anything – homes and cars are the usual suspects – you’ll want to have excellent credit in order to get the best interest rates and terms.
Otherwise, you’ll end up paying exorbitant interest, sending valuable money to your creditors that could be used to bolster your retirement account instead.
If your score can be improved, check out “7 Ways to Raise Your Credit Score Fast”.
7. Be a chicken when it comes to investments
Finally, “no guts, no glory” can apply to your investments.
Of course, you don’t want to be stupid about your money. Putting 100% of it in volatile stocks a few years before retirement is a good way to land in the hospice. But at the same time, be aggressive enough with allocations to ensure your returns at least outpace inflation.
If you need a quick crash course in terms like “diversification” and “asset allocation,” start with “14 Financial Terms You Should Learn So You Don’t Die Broke.”
If you’re feeling a little lost on exactly how to diversify your investments or choose a fund, check out “Build a Successful Retirement Plan with These 5 Steps.”
Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click on links in our stories.