For many, the promise of leaving the working world behind and sailing off into the sunset of retirement is enough to get them through the tough stretches.
Knowing that there will be a point when we are able to sustain ourselves financially without having to clock into a 9-5 can almost seem like a fantasy at times. And because retirement is often years off, lurking over the horizon, there is a rather large window in which people can make unfortunate blunders that carry lasting repercussions.
Whether it is reducing the overall length of one’s retirement or preventing them from retiring all together, these mistakes need to be avoided to ensure you the golden years you deserve.
The following are five things to avoid when planning out and saving money for retirement.
Start Saving For Retirement Too Late
With most people set to retire sometime in their mid-sixties, it is easy to feel as if you have all the time in the world to save up. As a result, people will spend their younger years travelling or paying off a mortgage while ignoring putting away for retirement.
When it comes to saving for retirement, it is important that you understand the role that time plays in enabling you an easy life down the road.
The ability for your money to compound while it is being saved is what allows you to retire after years of work.
This compounding effect acts a multiplier, increasing your money’s value. By putting away more money at a greater frequency for a longer period of time, you’ll be reducing the number of years you need to work in order to retire.
Underestimating Your Lifespan
When it comes to thinking about passing on, the natural tendency is to hold the belief that you will live a long life.
An interesting contrast to that line of thinking comes when individuals think about the same thing in the context of retiring. At that time, people like to imagine they’ll live an average lifespan, which enables them more flexibility with their money in the present.
Unfortunately, this way of thinking could cause people to be more susceptible to saving up too little, forcing them to be particularly conscientious during their retirement years and possibly causing them to face financial hardship.
As you save, be mindful of this and always overestimate your lifespan.
Prioritizing Children’s College Fund
Any good parent instinctively prioritizes the needs of their children over their own. And while this is commendable in all things, one time it is okay to put yourself first comes to your retirement saving.
By allocating large portions of your income towards your child’s education, you are subtracting from the amount you can put away to compound.
As a result, you need to make sure that you are putting away a sizeable amount for your later years. This does not mean you should not still save for your kids’ education, but it does mean you should be mindful in how much you put away for them.
When it comes time for your them to enter college, the opportunity to win scholarships or receive financial aid will offset the amount you allocated for yourself.
Fail To Diversify
When it comes to retiring, many people believe that focusing on one means of investing, along with other mindful changes to save along the way, will provide them with what they need when it comes time to stop working. Especially with moderate risk, high reward options like the stock market, it is easy to become intent on focusing all your attention on putting your savings into one money making place.
But as we all know, the market is subject to change.
The portfolio that houses the majority of your money can suffer a loss at any time. To compensate for this, it is imperative you consider a number of high risk and low risk options.
In your younger years, being more aggressive with your money is good. But always have more tentative measure in place like investing in bonds or putting your money in a Roth IRA account to ensure you have multiple streams of income and that if things are to go sideways, you will be okay.
Borrowing From Your Retirement Account
There come points in our lives when it sometimes feels as if we are between a rock and a hard place financially. During those times, people sometimes fall prey to the idea that it is in their best interest to tap their retirement savings in order to make it by.
This has a number of negative effects, first and foremost reducing your retirement savings and putting you at risk of incurring a penalty depending on the type of account you take from.
In addition, this has greater implications as it is another way for the compounding of money to be stopped. This can set you back years and hinder your ability to stop working earlier. As a result, it is important that you refrain from borrowing from your retirement account.
The only time you should ever really touch it is when it is finally time to stop working.