Tips for Establishing Smart Retirement Savings Strategies
Saving for retirement is a decades-long process. The actions you take today can greatly impact your ability to successfully retire years down the road. And while there are many positive steps you can take today to increase your chances of successfully retiring one day, there are also several bad habits that have the potential to derail your efforts. As you’re planning for retirement, be sure to avoid the following mistakes.
#1 – Waiting to save
One of the more severe ways to harm your long-term retirement savings is by waiting to save. Given the powerful impact of compounding interest, the assets you save later in life have far less growth potential than the assets you set aside when you’re young. Don’t tell yourself you’ll start saving at some point in the future — once you’ve paid off debt, purchased a home, received a raise, etc. Instead, start saving early and often. Even setting aside a small amount each month can have a big impact on your retirement savings over time. By the time you reach retirement age, you’ll be glad you started saving as early as possible.
#2 – Missing out on company matching contributions
Many employers offer a company match on a certain percentage of assets employees defer from their paychecks to a company-sponsored retirement plan, such as a 401k. If you’re not contributing enough to receive the full match amount offered, you’re essentially walking away from free money.
Take time to understand your employer’s specific matching contribution, and make it a priority to contribute, at the very least, an amount that allows you to receive the full company match.
#3 – Spending without a budget
If you’re at the beginning of your career, saving for retirement can seem like a lifetime away. If you’re struggling to make ends meet, it can be difficult to set aside savings for 30 or 40 years in the future. That’s where a budget comes in.
A budget can help you prioritize your saving and spending habits, which increases your chances of achieving long-term financial success. The key is to establish spending and saving guidelines and stick to them. You’ll need to be diligent about tracking every dollar that comes in and out, looking for opportunities to cut back on non-essential spending in order to make room for more important priorities, such as saving for retirement.
#4 – Contributing only to pre-tax accounts
Pre-tax accounts, such as traditional 401ks and IRAs, are a great way to save for retirement. Not only do pre-tax retirement contributions lower your taxable income in the current year but they can also grow tax-deferred in the account until you withdraw them. There is no denying the long-term tax benefits of saving pre-tax dollars.
However, it’s very beneficial to also have a source of after-tax savings when you begin taking distributions in retirement. Contributions made to Roth 401ks and IRAs are done so with assets that have already been taxed, which means when you withdraw the assets in retirement, the contributions and growth can be tax-exempt when withdrawn. When used in combination with pre-tax retirement sources, after-tax accounts can help lower your taxable income.
Your wealth manager can provide guidance to help you determine the right mix of pre- and after-tax retirement sources.
#5 – Borrowing from your retirement plan
Over time, borrowing from your retirement plan can significantly harm your long-term savings. Even if you pay back every loan you take, you’re missing out on the benefit of compounding interest. A better option is to save three to six months’ worth of living expenses in a liquid, low-risk emergency savings account. This can help you avoid the need to borrow from your retirement to pay for unexpected expenses.
#6 – Underestimating retirement expenses
In order to properly prepare for retirement, you need to have an idea of what it will cost you to retire. Inflation and expenses, such as healthcare costs, have the potential to significantly erode your retirement savings if not properly planned for.
Fortunately, your wealth manager has a wide range of tools at their fingertips to help you understand your potential retirement expenses and whether you’re on track to achieve your goals. By running expense projections that take into account various factors such as your life expectancy, monthly income needs, healthcare expenses, estate planning goals, etc., your wealth manager can stress test your retirement savings, assess whether you’re comfortable with the results and make any necessary changes in your retirement planning strategy to help keep you on track.
Could you use some help establishing better retirement savings habits? Creative Planning is here for you. Our experienced professionals help clients make smart financial decisions that take into account a wide range of personal and economic factors. We’re happy to help you establish a retirement savings strategy that makes sense for your personal financial situation. To get started, schedule a call with a member of our team.