3 ways to save money when saving for retirement
The average American worker is still struggling to save for retirement – for example, almost half of baby boomers have no money at all for their golden years, according to a report from the Insured Retirement Institute. That's just a financial concern among many for Americans: Money is our most common source of stress, according to a survey by Northwestern Mutual.
However, saving for retirement can be especially burdensome due to the complexity. Given that our individual financial goals can vary widely, there is no right way to do it.
That said, there are a few wrong ways to prepare for retirement – choices you may not think would have a significant impact, but which can end up costing you a lot of money in the long run.
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1[ads1]. Not contributing enough to 401 (k) for the entire employer race
Employer matching 401 (k) contributions is really free money. So if you are not directing enough money to your retirement account to earn the maximum amount your company will give you, you will miss it. For starters, the matching contributions may not seem to make a big difference in the balance of your pension account. But over time they add up.
For example, say your company matches 100% of employee contributions up to 3% of salary. If you earn $ 50,000 a year, that's $ 1500 a year extra you can get. But if you only contribute $ 1,000 per year to the 401 (k), you only earn a $ 1,000 match. Here you will see what your total savings would look like if you continued to save at that rate versus increasing your contributions to $ 1500 per year to earn the entire match (assuming you earn a 7% annual return on your investment):
| Years of contribution | 401 (k) Balance when you contribute $ 1000 per year ( + $ 1000 Match) | 401 (k) Balance When Contributing $ 1,500 per Year (+ $ 1500 Match) |
|---|---|---|
| 10 | $ 27,688 | $ 41,449 |
| 20 | $ 82 155 [19659013] $ 122,986 | |
| 30 | $ 189,299 | $ 283,382 |
Source: Author's Calculations
In other words, in this scenario, contributing $ 500 extra a year to your 401 (k) can add almost $ 100,000 to your net worth after a few decades. Also, this calculation does not account for salary increases you can come down, which will increase the amount your employer will match. In that case, you can miss even more money by failing to capture the entire fight.
2. Do not invest in shares
The stock market can be daunting and many associate it with risk. For that reason, some people try to play it safe with their savings by avoiding the stock market to some degree. In fact, 53% of those who save for retirement say they are displacing at least some of their cash into a savings account, according to a Morning Consult survey.
On the surface, that doesn't seem like a bad idea. Savings accounts are safe, and they avoid the market declines that inevitably accompany investing in the stock market. However, even those savings accounts with the highest return have only an interest rate of around 2% per annum. If you keep your cash in one of these accounts for decades, your savings may not even keep up with inflation – which means your money can actually lose value the longer you keep it there.
Of course, savings accounts still have their benefits. When you save for short-term financial goals and may need to withdraw your money at a moment's notice, you can't beat a high-return savings account. But if you want to be able to collect hundreds of thousands of dollars in savings over a few decades, the stock market is the way to go. This is especially important if you are struggling to save, because even a few thousand dollars can go much further in the stock market than a savings account.
It's easier (and less scary) than you might think to invest in the stock market – in fact, if you put your money into a 401 (k) or IRA, you already do. While you can't completely eliminate risk when investing cash in the stock market, there are ways to limit it – especially by investing in index and equity funds, which are essentially large stock exchanges. While annual returns vary greatly based on the individual fund and the overall market, you will typically see returns of anywhere to 6% upwards of 10% per year, while still limiting the risk.
3. Waiting too long to start saving
When you're in your 20s and just beginning adulthood, retirement is probably the last thing you think of. The sooner you start saving, the easier it will be to establish a robust pension fund.
The average age to start saving for retirement is 31 years, according to a Nationwide survey, though almost a quarter of Americans began saving in their 40s or later, Morning Consult found. Although it is never too late to save at least something for retirement, it will be exponentially more difficult to save enough the longer you wait.
For example, say you want to save $ 750,000 within 65 years. If you started saving at the age of 25, you would have to save just over $ 300 per month, provided you earn a 7% annual return on your investment. But if you wait up to 40 years to start saving, you'll have to spend about $ 1,000 a month to reach your goal, while all other factors remain the same. For many people, it is simply not possible to save so much, potentially leaving thousands of dollars on the table by waiting too long to start saving.
Saving for retirement can be difficult, and there are no sizes that fit any approach to preparing for the future. But by avoiding these potentially harmful financial habits, you can make it easier for yourself and save more money at the same time.