Saving for retirement requires planning and thoughtful consideration. Yet many individuals overlook the importance of saving for retirement at a young age, which can affect them as they get older and are ready for retirement bliss.
Here are three miscalculations people sometimes make when saving for retirement:
1. Not understanding how much to save
While a comfortable retirement is a common financial goal (and one worthy of a good daydream), many aren’t taking steps to ensure their savings habits today will prepare them for retirement down the line. Only 41 percent of workers have tried to calculate how much money they will need in retirement, according to the 2017 Retirement Confidence Survey by the Employee Benefit Research Institute. Even fewer (38 percent) have estimated how much income they would need each month in retirement, while just 34 percent have calculated their expenses in retirement.
2. Not saving with an IRA or 401(k)
People give various reasons for why they are not saving for retirement. With any task, the hardest thing is often getting started.
One key consideration for those saving for retirement is opening an Individual Retirement Account (IRA) or 401(k). Both of these savings vehicles have specific tax advantages for saving for retirement.
If you are saving for retirement without using an IRA, 401(k) or a similar account, you could be missing out on significant tax savings.
3. Not saving enough money
The 2017 Retirement Confidence Survey reports that of those individuals calculating how much they need for retirement, 64 percent estimate they will need $500,000 or more, with 37 percent anticipating they will need at least $1 million. That’s no small chunk of change, especially when the same report finds that 47 percent of respondents providing this type of information say that the total value of their household’s savings and investments (not including the value of their primary home and defined benefit plans) is less than $25,000. Nearly one-quarter of those respondents say they have less than $1,000 in savings.
Only 41 percent of workers have tried to calculate how much money they will need in retirement.
If you’re not tracking toward your retirement savings target, it may be easy to think that you can just work a few extra years to make up the difference. The same retirement report, however, shows a significant difference between workers’ expected retirement age and retirees’ actual retirement age. While only 17 percent of workers say they plan to retire between the ages of 60 and 64, for example, 38 percent of retirees actually retired in that age range. When low savings and early retirement combine, you may not have as much saved up for your golden years as you had hoped.
These findings could mean that many individuals have to rely on Social Security far more than they expected. According to Gallup research, 30 percent of non-retirees in 2018 said that Social Security would be a major source of income when they retired. Talk to retirees, and 57 percent said Social Security was a major source of their income. This is a sizable difference between retirement savings expectations and reality.
Educating yourself on how much to save for retirement can’t wait. Take the time now to learn about saving for retirement. Your future self will thank you.