5 retirement savings thinking traps (and how to avoid them)

When do you plan to retire?

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No matter how many years before you have to dip into your own savings, it’s always important to have a plan.

The National Retirement Risk Index (NRRI) measures the percentage of working-age households that may not one day be able to reach their standard of living before retirement. The NRRI shows that 50% of households may not have enough money to maintain their standard of living in retirement. The NRRI concluded that saving more and working longer can dramatically change this trajectory.

There are many factors that explain why people don’t save enough for retirement, but one of the things you can do is change the way you think. Let’s go over some toxic retirement savings thoughts you might have and how to eradicate them.

Trap 1: “I have an eternity to save. “

In fact, time is exactly what you to do need your side when saving for retirement. Unfortunately, when you think you’re going to ‘get it done’ or ‘someday you’ll start’, that precious time is going by the wayside.

Can you guess Americans’ biggest financial regret? They deeply regret waiting too long to start saving for retirement, according to a Bankrate survey. The survey found that respondents aged 50 and over expressed this more readily than younger respondents.

Don’t fall into the trap of thinking that you will have more money and more flexibility to save for retirement “next year” or “in five years”. You’ll have expenses around every turn – the down payment for a new home, child care costs, college savings. Expenses keep piling up and each year you delay your retirement means you risk not capitalizing on your savings.

The point is, the best time to save for retirement is when you were 16 and started your lawn care business.

Trap 2: “If I save just enough to get the company game, I’ll be fine.

You may not be “well”. You may need to save more, a lot more.

It is true that it is better than nothing. In fact, let’s do some quick math to illustrate what that might look like. Let’s say you earn $ 50,000 per year and your employer’s correspondence totals 5% per year. This means that you would save $ 2,500 in one year and your business would invest an additional $ 2,000, which would add up to $ 4,500 per year.

You would have about $ 26,200 over 30 years with an annual return of 6%. Now let’s say your salary has increased by 2% per year. Your account would be worth almost $ 70,000 in 30 years. It would reach just over $ 200,000 in three decades.

But… $ 200,000 may not be (and probably is not) enough.

Let’s say instead, you invest 15% of your $ 50,000 salary, or $ 625 per month. To simplify the math, let’s say you’ve never had another raise. If you started at 22 and saved $ 625 per month, you would have about $ 1.7 million, assuming a 6% return.

In other words, save more than just matching the employee.

Trap 3: “It’s too hard to invest.”

Many people say they have a hard time saving and cannot even save $ 1,000 in an emergency.

However, when you set up a mental block that is too hard to save, you can still believe that only “other people” get rich by investing or that “other people” can save, but not you. .

These mental blocks are powerful and can become a self-fulfilling prophecy.

Visit your company’s human resources office and request an appointment with a representative of the company that manages your retirement account. They can help you a lot more with setting up your retirement fund and even help you organize it so that you don’t even miss the money when it’s taken out of your paycheck.

Don’t fall for this ubiquitous mental block. Investing can become second nature if only you take action and eliminate the fear. Sometimes having a financial advisor to guide you can make a difference.

Trap 4: “I will never accumulate enough money to make a difference.”

Let’s take a look at how much you would need to invest monthly to build a million dollar nest egg at age 65. Assuming an annual rate of return of 7%, you should save:

  • $ 381 per month from 25 years old
  • $ 820 per month if you start at 35
  • $ 1,920 per month if you start at age 45
  • $ 5,778 per month if you start at age 55

Granted, you’ll need to save a lot more starting at age 55, but think about how saving into a pre-tax retirement plan can help you feel the bite less. Let’s say you choose to save $ 500 per month. Because the money is taken out of your pre-tax paycheck, you won’t see $ 500 less on your paycheck.

However, determine if a pre-tax or 401 (k) IRA makes more sense to you compared to a Roth 401 (k) or IRA. You can consult a financial advisor to find out what is right for your financial situation. (You can also choose to combine the two.)

Trap 5: “I can make up for a shortfall by retiring later or working part-time after retirement. “

You may not be able to do it.

Many workers have to stop work earlier than expected for health reasons, to care for a spouse or family member, or for other reasons. You don’t know what your medical condition or family needs will be like, so it is not always possible to plan to work in your old age.

In addition, it is important to remember that unemployed seniors are traditionally hired more slowly, especially in times of recession. The unemployment rate of older workers remains lower than that of their younger counterparts, according to the AARP Public Policy Institute.

Avoiding the pitfalls of retirement

Traps like “I can’t…” or “It’s too hard…” can spell the end of your wallet. You can face a huge shortfall if you let these “thought traps” take over.

Most of the time, a frank conversation with a financial advisor can help you realize that you can’t afford not to act on your retirement savings. The sooner the better, yes, but saving now versus later will pay dividends later. (Literally.)

About Meredith Campagna

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