Many of today’s young workers have a remarkably cavalier attitude toward retirement savings. This may have something to do with the fact that, for them, retirement is still decades away. But that time goes by faster than many think. If you want to give yourself the best shot at a comfortable future, there’s one mistake you can’t afford to make.
How seriously are you planning for retirement?
Approximately 40% of workers across all generations prefer not to think about or concern themselves with retirement investing until they are closer to retirement, according to a recent Transamerica survey. This attitude was most common among Gen Z and millennials, where 54% and 48%, respectively, felt this way. Yet it exists even among some Gen Xers and baby boomers.
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The problem with waiting to take your retirement investing seriously is that every year you put it off makes your job more difficult. Your earlier retirement contributions end up being your most valuable ones later on because they tend to accrue the most investment earnings. Your more recent contributions aren’t invested for as long, so they have a shorter window to grow before you withdraw them.
When you start saving later, you have to set aside more of your own money each month to retire when you’d like. For example, let’s say you’d like to retire at 65, and you believe you’ll need to save $1 million on your own. If you started saving at 25, you’d only need to set aside about $403 per month to reach your goal. But if you waited until 26 to start, you’d now need to save $433 per month, and if you waited until 30, you’d have to save about $581 per month.
You’d end up contributing over $50,000 more of your own money if you put retirement savings off until 30 as opposed to starting at 25. And you could cost yourself even more if you wait even longer to begin.
To be clear, the Transamerica survey didn’t say that the survey respondents weren’t saving for retirement, only that they preferred not to think about retirement investing until they were closer to their retirement date. But investing without thought can also create challenges.
If you aren’t paying close attention to your investments, you could make costly mistakes, like not adjusting your asset allocation to match your risk tolerance or choosing high-fee investments that slow the growth of your savings. You could also end up saving less than you need if you haven’t worked out a plan for how much your retirement will cost.
Solving these problems on the eve of your retirement is challenging and may not be possible in all cases. That’s why it’s crucial to take retirement savings seriously no matter how far away your retirement might be.
How to ensure your retirement investing plan is on track
You can’t know if you’re saving enough for retirement until you have an estimate of how much your retirement will cost. Figuring this out should be your first step if you haven’t done so already.
You’ll need to know when you plan to retire and how much you believe you’ll spend annually. Keep in mind that your spending habits in retirement may change compared to what they are now. You’ll also need to include estimates for inflation and your investment growth. Use a 3% estimated annual inflation rate and a 5% to 6% investment rate of return to be conservative. A retirement calculator can help you put all this information together.
Once you know the total cost of your retirement, you can subtract money you expect from Social Security, a pension, or other sources to figure out what you need to save on your own. Your retirement calculator may help you with a monthly savings goal.
Aim to meet this if you can. You might have to alter your budget so you can put more money toward retirement. If your plan doesn’t seem feasible, you may have to delay retirement to give yourself more time to save.
Also, make sure you’re thinking about where you’re putting your money rather than just tossing it in a retirement account and forgetting about it. Choose your retirement account carefully based on which one offers you the greatest advantages. This might be a 401(k) if your employer offers a match, or it could be a Roth IRA if you want to take tax-free withdrawals in retirement.
Think about your investments too. Choose low-cost options, like index funds, whenever possible, so you can keep more of your savings. Make sure your asset allocation matches your risk tolerance as well. A good rule of thumb is to keep 110 minus your age invested in stocks. That means you’d have about 80% of your savings in stocks when you’re 30 and the remaining 20% would be in bonds. As you age, you adjust your asset allocation to help you protect your growing nest egg.
Once you’ve got a retirement plan, reviewing it once or twice per year shouldn’t take that much time. It’ll keep you focused and help you feel confident that you’re doing what you need to in order to enjoy a comfortable retirement.