Mistakes are part of life, and sometimes you can’t avoid them. Especially when it comes to complex financial topics like planning for retirement, nobody has all the right answers.
But not all mistakes are created equal; some are more dangerous than others. And the most threatening mistakes are the ones you may not even realize you’re making. By the time you recognize the error, it could be too late to do anything about it.
There’s one retirement mistake in particular that nearly half of workers are making. And the sooner they realize the problem, the better chance they have of keeping their retirement savings on track.
Starting early is key to successfully saving for retirement
A whopping 42% of U.S. workers say they’d rather not think about saving until they get closer to retirement age, according to a report from the Transamerica Center for Retirement Studies. Even among baby boomers — the generation closest to retirement — 28% are holding off on saving until they’re closer to their golden years.
Although it may not seem so dangerous to postpone retirement preparation (especially if you have decades until you can even consider retiring), the longer you wait to begin saving, the harder it will be to build a healthy retirement fund.
Your retirement fund relies on the power of compound interest to help your savings grow. It’s essentially when you earn interest on your interest, so the longer your savings sit untouched in your 401(k) or IRA, the faster they’ll grow. That means that the earlier you start saving, the less you need to save each month to build a big nest egg.
For example, say you have a goal of retiring at age 65 with $700,000 in savings. If you start saving at 25, you’d need to save just under $300 per month to achieve that goal, assuming you’re earning a moderate 7% annual rate of return on your investments. But if you wait until 40 to begin saving, you’d need to sock away roughly $925 per month to reach that same goal.
Of course, saving early only works if you actually have cash to save. One reason many people may put off saving is that they’re stretched thin financially and simply don’t have any extra money to put toward retirement. If that’s the case, there are a few strategies that can help you save more — even when you’re on a tight budget.
When you don’t have much to spare
If money is tight and you have multiple financial responsibilities tugging your wallet in different directions, saving for retirement may get pushed to the bottom of your priority list. But every dollar counts, and it’s a good idea to try to scrounge up as much cash as you can to save now so that you won’t need to work so hard in the future to catch up.
To start, make sure you’re tracking your spending so you know exactly where all your money is going each month. It’s easier to see if you’re overspending in certain areas when all your expenses are laid out in front of you, and from there, you can figure out if there’s anywhere you can cut back.
Keep in mind that you don’t need to slash your budget down to the bare bones to save money. Trimming your expenses by just a few dollars across every category can add up, and you’re also more likely to stick to a budget when you don’t feel like you’re depriving yourself of everything you love. So go ahead and buy that latte, but instead of grabbing a coffee every single morning, see if you can cut back to a few times per week. This way, making healthy financial choices becomes a way of life, but you can still enjoy your guilty pleasures.
To save even more money, see if you can get creative with your other financial responsibilities. For example, if you’re struggling to pay down high-interest credit card debt, consider getting a balance transfer card — which will allow you to transfer your balance to a new card and pay 0% interest for a set period of time. That means you can put more money toward the principal and save on interest, which in turn means you’ll have more cash to put toward your retirement.
Saving can be challenging, especially if you’re doing your best just to make ends meet. Although it may be tempting to put off retirement saving until you have more money to put toward it, you might regret that decision when you’re just a few years from retiring and you need to supercharge your savings to catch up. Although it’s not easy, saving whatever you can now will make your life much easier down the road.