Avoid These Common Mistakes When Saving for Retirement

People have decades to prepare for retirement, yet too many make simple mistakes that can derail their ability to achieve financial goals. Fortunately, many common errors are easily avoidable with some planning. Here are six of the biggest mistakes to watch for:

1. Not saving enough. If you're doing well financially now, it's tempting to think that retirement saving will take care of itself. But that view overlooks a key detail: If you expect to maintain your current lifestyle in retirement — which could last three decades or more — and you'll no longer have an income stream, you must accumulate a surprisingly large sum, especially when inflation weighs on your savings.

elderly couple frustrated by their retirement savings

2. Failing to plan. It's important to work closely with your advisor to develop a financial plan that's tailored to your individual needs because there's no one plan that works for everyone. A good retirement plan considers factors such as:

The more specific you are about your financial resources and requirements, the more confidence you'll have in your ability to achieve your financial goals.

3. Not expecting the unexpected. Even if you have a well-financed retirement plan and you plan to work well into your retirement years, unexpected events can happen. Family emergencies and health crises can wreak havoc with all but the most well-funded retirement portfolio. Therefore, it's essential to be both optimistic and realistic if you want your portfolio to last a lifetime.

A smart retirement plan includes a margin of safety, allowing you to be better prepared for whatever the future brings. While you can't anticipate every possible contingency, the greater your financial cushion, the less likely the unexpected will cause you to scale back your lifestyle goals.

Work with your advisor to develop a realistic but flexible plan and determine the right amount of money to set aside.

4. Investing improperly. If your retirement portfolio is too heavily focused on conservative fixed-income investments and the cost of living rises faster than your savings, you may end up losing money to inflation. Of course, the opposite approach also is risky — if you invest too aggressively to build wealth more quickly, you may become exposed to excessive market risk.

Often, it's a balancing act between the reward you seek and the risk you're willing to accept. This is where diversification strategies come into play. A portfolio of multiple securities and various asset types can reduce the risk of suffering a significant loss.

5. Not starting early enough. There's a reason why people refer to the "magic" of compound earnings. The sooner you get started in saving for your future, the more time your money can work for you. Consider a $250,000 portfolio at a hypothetical 6% annual rate of return, compounded monthly. If you don't make any additional contributions and leave it to grow for 10 years, you'll finish the period with roughly $455,000. But if you have 25 years available for it to accumulate, that same portfolio will be worth more than $1.1 million.

Of course, this doesn't include any consideration for taxes or your ability to achieve your savings goals. But the basic truth still applies — the earlier you invest, the less you'll have to save each year to achieve your long-term objectives. The longer you wait, the more you'll have to put away to make up the difference. Remember the most important rule: There's no time like the present to get started.

6. Failing to update your plan. It's easy to assume that your healthy financial condition today guarantees your future financial security. But that's perhaps the biggest mistake of all. So take action now by reviewing your retirement plans with your advisor. Understand tax consequences and the effect of compounding. Start early, save enough and manage risk carefully, and you should have a comfortable retirement.

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