retirement, retirement planning, saving for retirement

Two costly misconceptions in retirement planning

Planning and saving for retirement are among the most important aspects of personal finance. After working hard for the majority of adult life, most look forward to winding down and enjoying a comfortable lifestyle during retirement. While more people are aware of the importance of saving ahead for your retirement, there are still two general mistakes that can be costly down the road:

1. Not saving early enough

Many young people don’t give much thought to saving for retirement, especially if they’re earning a modest paycheck and having to prioritize immediate financial needs. But timing has a big impact on how much you need to contribute to your retirement savings: Assuming a hypothetical interest rate of 8% and a goal of one million dollars saved by the age of 65, you will need to deposit $189.59 every month if you start at 20, compared to $435.94 if you start at 30!

In short: When it comes to retirement planning, save early. We recommend looking into your company’s benefits and 401(k) plan at the very beginning of your first full-time job (learn some basics of benefits and 401(k)) plans here).

2. Saving by income, not goal  

retirement, retirement planning, saving for retirement
Are you making sure you will be able to life comfortably during retirement?

It’s easy to take the approach of putting a certain percentage of your income toward retirement savings, just as you do with your emergency fund. But unlike an emergency which might happen and would require a portion of your reserved money, you will have to retire and the money to support yourself without a job will be much more substantial. Considering the general retirement age in the U.S. is late 60s compared to the often much longer life expectancy, you can have 20-30 years of life that you need to plan for, plus the rising healthcare costs along the way. You don’t want to be caught in the stressful situation of not having the financial backings to support your lifestyle at old age.

This is why retirement planning should be a backward process. Start first with the question: How do I want to live my retirement?

Saving for retirement is a long process – but critical to your life during retirement.

Have you or someone you know made one of both of these mistakes while saving for retirement? What other insights do you have for effective retirement planning?

4 thoughts on “Two costly misconceptions in retirement planning

  1. Planning for retirement is paramount to success and happiness in life. To neglect preparing for this is even selfish because the burden then falls on children to take care of their parents.

    The power of compound interest is at play here. Starting early is key, so that money stays invested longer and can grow to a larger amount. Simple time value of money calculations I think are necessary for everyone to know.

  2. Saving at a young age seems like a hard thing to do, especially at 20 when most 20 year olds are instead saving for a car rather than something for 40 years later. After seeing how much you can save yourself if you start early is a real eye opener.
    Also realizing how much money you have to save up for and not realizing how the economy will be in those 20-30 years can be tough. It makes you want to actually put a little more around the age of 50 after you see how the economy is at that time.

    1. Hi Erin – Thank you for your input. What you say is correct…saving now is hard because of other priorities, and you are right to make it a priority. There is always something to distract you and get in your way of saving for retirement. Get started ASAP, and it will help you in the long run.

      Secondly, your point to review how you are doing is also correct, but don’t wait until you are 50! You should do an annual check of how you are doing. As a part of this review, check your budget. Can you afford to start putting more away (did you get a raise? Is your car payment less than you had originally budgeted for?)? If yes, do it! Also, start looking at how much you will need to afford your desired retirement lifestyle. The more you can plan, the more likely you are to reach your target. The earlier you start to plan, the more time you have to work towards your goal.

      Be sure to check this week’s post (posts tomorrow afternoon)! We will discuss this in more detail.

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