While we can learn a lot from our own mistakes, we can learn from the mistakes of others, too — this is true in life and true in retirement planning as well. Below are three common retirement-planning mistakes that you can learn from as you prepare for your own retirement.
Not saving earlier
Starting to save for retirement earlier in life makes it easier to reach your retirement goals. This isn’t just because you have more time to save, but also because your investments have more time to grow. Compound interest is a powerful ally and it is more effective when it has more time to work. As such, the sooner you start saving and investing the better.
For example, a 25-year-old who sets aside $100 every month and receives an average 6% annualized return would have over $185,000 by the time he was 65; if he waited until 35 to start this savings plan, he would have less than $95,000 by the age of 65.*
Underestimating the cost of retirement
Certain expenses might go down once you retire (e.g., gas and car maintenance), but some expenses may rise (medical bills, for example). Additionally, the cost of being more active and pursuing interests throughout retirement adds up. Before retirement, you likely spent most of your days working and making money. During retirement, you’ll have to find ways to fill your free time; instead of making money, you may find yourself spending it. Traveling, sports, hobbies, and shopping: all these things can lead to more expenses than you had saved for.
It’s important to consider all of your possible retirement plans and expenses and estimate an appropriate savings goal. The cost of retirement might be more than you expected, but it’s better to find that out before retiring than after.
Not diversifying and investing too conservatively
Investing conservatively can protect the principal of your investments. However, the smaller returns often associated with conservative investments can hinder your retirement savings. Your money may grow, but it may not grow fast enough.
This is one reason it is important to have a diversified portfolio. While nothing but stocks can be too risky, nothing but bonds can be too conservative. A mixture of both along with other investments can increase returns through riskier investments while tempering those risks with safer, more conservative options.
That isn’t to say that it’s never appropriate to invest conservatively. Just how much risk you should take on will depend on your risk tolerance, as well as how soon you’ll need to tap into your investment. If you are decades away from retiring, you can afford to have more risk in your portfolio; if your investments hit a rough patch, you’ll have plenty of time to recover. On the other hand, if you’re close to retiring, a more conservative approach is usually better.
Where are you in your retirement planning?
Have you started saving for retirement? Are you unsure if you’re saving enough? Either way, Covenant Trust Company is happy to assist you in your retirement planning. If you need to know how to get started or have questions, feel free to contact us or leave a message below.
*Numbers are just estimates and used for illustrative purposes only.
Covenant Trust Company is a financial services company owned by the Evangelical Covenant Church and its affiliates. Our services are available to anyone in need of asset management, retirement planning, legacy planning, gift planning, or trust services. In addition, we seek opportunities to encourage and promote healthy financial habits, and keep a personal finance blog at www.covtrustblog.com.