Common Retirement Mistakes to Avoid
In today’s retirement planning environment, early preparation and education are far more vital than they ever were before. Gone are the days of widespread employer-provided pensions, whereby your employer would annually contribute to your retirement well-being. Now, defined contribution plans shift the retirement financial burden from the employer to the employee.
Workplace-based savings vehicles, such as 401(k) plans, reward employees who actively contribute to their plan, and tax exemptions further encourage long-term retirement investment. However, full financial responsibility really falls from the employer to the employee. And while automatic matching benefits from employers boost monthly contributions to such funds, 401(k)s should not be relied upon as a sole source for retirement income. Included here are some basic recommendations for young professionals who need more information about financing their retirement.
Start with these recommendations to stay on track for retirement
While this list isn’t exhaustive, it is a great start for those who worry about the status of their retirement planning strategy.
Don’t forgo a budget – assess your income and expenses
Shockingly, two out of three Americans do not prepare a detailed household budget. However, ignorance is not bliss, and being aware of your income and expenses is what empowers you to take the first steps in putting away money for your future. Being aware of your finances, both income and expenditures, empowers you to put away additional savings when you can. Begin by writing down all of your financial streams – credit card accounts, paychecks, and any other income and expenses. Recording these, especially on a monthly basis, will help you plan for both your immediate future as well the type of lifestyle you can afford down the road, even during retirement. For an additional boost, look into budgeting tools that may be available through your bank, or explore free and low-cost options like Mint or You Need A Budget.
Don’t put off enrolling – start contributing to your savings ASAP
Now that you have a better idea of your personal budget, you should begin contributing to your workplace savings plan – usually a 401(k) or Roth 401(k). This is especially essential for young professionals in their first job out of school. Delaying your first contribution could be costly – every month of compounding interest will accumulate more and more as you get closer to retirement. Even if you can’t contribute as much in the beginning of your career, by starting early, you are setting yourself up for better returns on long-term investments.
Don’t leave money on the table – maximize your 401(k) contribution as soon as possible
Contributing is a good start, but how much? While the ideal answer is to contribute up to the maximum (which, in 2017, is $18,000 for people under 50), that goal is pretty challenging for many people just starting out, and may take away from other important savings goals, such as the establishment of an emergency fund. A good starting point is to begin by contributing enough to maximize your company’s maximum matching amount, then work toward reaching a maximum annual contribution.
Don’t contribute a flat amount – contribute a percentage of your paycheck
Some make the mistake of contributing a hard dollar amount to their 401(k) each month, but our advisors recommend creating a monthly percentage contribution. While many young people think it is enough to begin with a hard-dollar contribution (say $100 per month), they typically forget to increase their contribution amount after a salary raise or end-of-the-year bonus. By starting out with a percentage contribution, the amount contributed will automatically adjust to an increase in salary.
What percent of your monthly salary should you contribute? While a double-digit percentage – 10-15% – is recommended, it may feel more comfortable to begin at 5-6%. Regardless, you should increase your contribution 1% per year until you reach the maximum contribution allowed, typically between 15-18%.
Don’t assume you’ll have enough – assess your future cost of living
Knowing how much money you will need during retirement is hugely dependent on your lifestyle and expected costs. To start, give yourself a ballpark estimate of what you’ll need to retire. The general rule is that you will need 65-70% of your current household budget, but often estimates exceed that percentage, especially if you live a luxurious lifestyle. If that’s you, you may be looking more into 100+% of your current household budget. If you’re still unsure, talk with a trusted financial advisor or try the AARP Retirement Calculator.
Don’t ignore the cost of healthcare – understand your medical expenses
Especially as a young person, it is easy to underestimate the medical costs associated with old age. Additionally, many people overestimate the Medicare benefits they’ll receive once they reach retirement age. Don’t apply the “it won’t happen to me” mentality. Be financially prepared for life’s unexpected health events by understanding your medical history and your health coverage. At some point, it is worth researching supplemental health savings in addition to Medicare.
Though this advice is seemingly outside of the realm of financial advisory, taking your health into your own hands can pay off down the road. Embrace healthy habits, and get into the habit of visiting your doctor on an annual or bi-annual basis. The benefit here is twofold: creating a lasting relationship with a personal physician who knows your medical history, and keeping you more informed of your future health.
Planning for your retirement requires some forethought and real preparation. The critical steps outlined above will take the young professional millennial to a real level of basic preparation. Maximizing percentage contributions, preparing a budget, and estimating your future cost of living are all necessary steps for the transition from dependent student to an independent adult. Not everyone’s retirement needs are the same, so taking the time to outline your retirement strategy is invaluable to your future success.
Related pages: BELR Retirement Plan Advisory, BELR Adding Automatic Features to your 401(k) Retirement Plan, Principles of Successful Retirement Plan Design, Retirement Readiness, BELR 2017 Q1 Review: “Patience Pays”