35% of Americans Are Making This Big Retirement Planning Mistake
Don't fall victim to the biggest retirement planning mistake. See how much you can save for retirement starting with $100 per month.
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If you want to save money for retirement, the best strategy is to start. That's because the sooner you get going, the more time you have for your money to grow.
The stock market tends to go up over time, sometimes by a lot; the S&P 500 index is up 18% so far this year, and up 88% in the past five years. If you keep investing in a diversified portfolio of stocks and leave your money alone to grow throughout your working life, you're likely to build up a significant nest egg for retirement.
Unfortunately, a big percentage of Americans are making the biggest retirement planning mistake: They're not saving at all. Let's look at why this is a mistake and how your money can grow with the power of long-term investing.
The biggest retirement planning mistake: Not saving
According to a recent survey from FlexJobs, 35% of people said they're not currently saving for retirement. This includes 15% of Americans who said that they are not saving for retirement at all, and 20% who said they are not yet saving for retirement, but plan to start.
Here's why not saving for retirement is a big mistake: You can't count on Social Security to give you enough income for a comfortable life. Social Security retirement benefits only replace about 40% of the typical worker's pre-retirement income. But most retirement experts recommend at least 80% of your pre-retirement income to be "comfortable" in retirement.
This means that Social Security might only give you half the income you need for a good life in retirement. Unless you want your living standards to take a big hit after you leave the workforce, it's important to save for retirement and invest in a diversified portfolio of stocks -- early and often.
How to start saving for retirement
It's understandable that many people might struggle to save for retirement. If you're living paycheck to paycheck, battling against high-interest debt, or facing high costs of housing and car ownership, the idea of putting a chunk of your paycheck into a 401(k) or other retirement account might feel impossible.
If you're in this situation, especially if you're still in your 20s, you might need to wait a few years, pay off debt, and improve your career prospects before you're ready to save for retirement.
But many people can find enough flexibility in their monthly budgets to boost their retirement savings. Here are a few basic tips for how to start saving for retirement.
1. Use your retirement plan at work (if you have one)
Many employers offer a 401(k) plan or other type of defined contribution retirement plan. You can put money into this account to reduce your taxable income and let your money grow tax-deferred until you retire. Some companies offer their employees automatic enrollment into a 401(k) plan to help people save for retirement without having to make any extra effort.
2. Get your full employer match (if available)
If your employer offers a matching contribution for your 401(k), be sure to get that money. It's free money that you deserve to have as part of your compensation for all your hard work. Just like you shouldn't decline your company health insurance plan or let your paid vacation days go to waste, you should get every dollar of your employer match.
For example, if your company matches 50% of the first 6% of your salary that you put into your 401(k), this will automatically boost your retirement savings to 9% of your salary. If you make $60,000 per year, that means your employer match is helping you save $5,400 per year for retirement.
3. Open a traditional IRA or Roth IRA (if you qualify)
If you don't have a retirement plan at work, don't get an employer match, or just want some other options for how to invest for retirement, you can open a traditional IRA or Roth IRA account. These are tax-advantaged accounts to help people save thousands of dollars per year for retirement.
Some restrictions apply based on income and your household tax-filing status. Check the IRS website to see if you qualify for a tax deduction on the contributions you make to a traditional IRA, or if you're eligible to use a Roth IRA for tax-free growth.
How your retirement savings can grow
Here are a few examples of how much your retirement savings can grow based on what age you start saving and a few different choices of how much you invest per month.
We're assuming that your retirement savings are invested in a diversified portfolio of mostly stocks with average annual returns of 8% per year.
| Age | Years Left to Save for Retirement | Money Invested per Month | Retirement Savings at Age 67 |
|---|---|---|---|
| 25 | 42 | $100 | $365,092 |
| 25 | 42 | $200 | $730,184 |
| 25 | 42 | $300 | $1,095,276 |
| 30 | 37 | $100 | $243,684 |
| 30 | 37 | $200 | $487,368 |
| 30 | 37 | $300 | $731,053 |
| 35 | 32 | $300 | $483,168 |
| 35 | 32 | $400 | $644,224 |
| 35 | 32 | $600 | $966,337 |
| 40 | 27 | $600 | $628,925 |
| 40 | 27 | $800 | $838,567 |
| 40 | 27 | $1,000 | $1,048,209 |
| 45 | 22 | $600 | $399,288 |
| 45 | 22 | $800 | $532,384 |
| 45 | 22 | $1,000 | $665,481 |
Bottom line
Don't wait to start saving for retirement. Even if you can start with $100 or $200 a month while you're in your 20s, you can make big progress toward your retirement savings goals. But if you wait until you're in your 40s to start investing, you'll need to save much more per month.
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