The Biggest Budgeting Mistake You’re Making
If you’ve been reading our educational articles regularly, you have already heard about the importance of retirement savings many times.
But it’s important enough to say it again: if you’re not allocating part of your budget to retirement savings, now would be a good time to start. And if you’re not saving or planning to start “someday,” you could be making a big mistake.
Here’s what you need to know.
Is there a looming retirement crisis?
Two-thirds of working Americans don’t contribute to their workplace retirement plan, and only 10% of Americans are covered by a workplace pension plan that provides retirement benefits. This lack of retirement planning is worrisome: with fewer resources to fall back on, there’s a very real chance that a significant number of Americans might not be able to retire comfortably, if at all.
Add in concerns about Social Security’s ability to meet future liabilities and the usual wild cards in everyday life – health crises, accidents and injuries, or chronic illness – and, in our opinion, it’s hard to avoid the conclusion that a happy retirement isn’t something you can rely on someone else to build for you.
That’s why having a retirement savings strategy matters so much.
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The earlier you start, the more time you’ll have to contribute to your savings and take advantage of the incredible power of compound interest.
So, if you have a retirement plan at work, consider signing up – preferably today. 401(k) plans typically have higher contribution limits than other alternatives and may offer a matching employer contribution, which is usually a worthwhile perk of these programs.
If you don’t have access to a retirement plan at work, you could consider one of the many Individual Retirement Account (IRA) options out there.
We offer a wealth of articles and insights into 401(k) and IRA plans and strategies in our Investor Education portal – you can search or browse the topics most important to you!
With both IRAs and 401(k)s, you should find out if you can automate your savings.
Workplace plans typically take contributions straight from your paycheck. If you have an IRA, check with your plan to see what you can do. Automated savings are typically a lot easier to stick with, so it’s often a worthwhile undertaking.
Don’t succumb to this major savings stumbling block
For many would-be savers, the most serious stumbling block isn’t a lack of interest or desire to save: it’s the feeling of not knowing how much to save, or that you’ll never be able to save enough.
Just keep in mind: when it comes to retirement savings, don’t let the perfect be the enemy of the good. The first step is to make a plan and to start – even if you can’t meet your goal right away.
The simple process of taking action can help you reach your goal, while waiting until your life changes is unlikely to get you anywhere at all.
How to get started
Start the process by figuring out how much you want to save – both as a long-term goal and as an immediate priority.
As you probably know already, this isn’t as easy as it sounds: You might have seen advice that you should save 12% to 15% of your salary, or the recommendation that you max out your employer match, or the instruction that you should try to reach your contribution limit every year – first for your 401(k) and then for your IRA.
Why are there so many differing viewpoints?
The honest answer is that how much you need to save depends on you: your goals and plans, your lifestyle, your health, and your long-term career options. Your tolerance for risk and investment needs should also be taken into account.
These aren’t simple assessments, which is why many people who want to get serious about retirement savings seek out an advisor. But you can make real progress without a professional – our free retirement planning eBook series is a great start.
And if the calculations and estimations are a little overwhelming right now, that’s okay too.
Build momentum by starting.
Whether it’s $20 a week or $500 a month, whatever you can pay into your savings will help you build the most critical habit there is when it comes to retirement planning: the willingness to start, and the willingness to build from there.
Building momentum, build a plan
Of course, we all know that you probably won’t be able to retire on a $20 a week savings habit. Again, don’t let the perfect be the enemy of the good!
Use your starting point, whatever it is, as a start.
Then, to build your habit, take another step. You could:
- Open an IRA to complement your new savings habit.
- Nudge your savings a little higher, even if it’s just to $25 a week.
- See if you can free up money somewhere else to save a little more, maybe with the goal of maxing out your employer’s matching contribution.
- Allocate part or all of your raise to your retirement savings. You probably won’t miss the money and you will feel great about it – especially once you start seeing the impact of compound growth.
Individually, these are small steps. But taken together, they can help you grow from a newbie retirement saver to a retirement savings powerhouse.
So, start today, and take small, incremental steps towards your goal. Building a nest egg that can see you through retirement and the “slings and arrows” of life is a worthwhile undertaking – and your retirement-age self will surely thank you for it.
Are you ready to make a plan?
Don’t forget to check out our free retirement savings workbook series. It will help you get an understanding of your options, build a plan that works for you, and get started with your retirement savings goals. Download it here today!
Download Your Retirement Savings Guide: Get Started