So you say you’re already contributing to some form of retirement account? Congratulations—you’re working on making your future self very happy. That’s because the secret to retirement savings is that you can’t make up for lost time. Knowing just how much to save is one of the hardest financial challenges there is. You might try a calculator, or talk to a financial planner to figure out your big picture. And, in the meantime, you should avoid any little missteps that might put a crack in your nest egg. Here are some common pitfalls when it comes to saving and investing for retirement, and how you might avoid them.
1. Having No Clue How Much You Need to Save for Retirement
Just like you have a figure in mind when you’re saving for a car or house, knowing what your long-term retirement goal is can help you figure out a savings plan to help you reach it. If you see you need Rs. 1 million for retirement, which could jump-start savings. Just remember that you do have compound growth to help you build your investment—and the younger you are, the more time is on your side.
Get an idea of the total amount you may need in retirement, based on factors like how much you have saved so far and your annual estimated expenses. Just be honest and meticulous when entering the information and you should come up with a reasonable amount. Your number could also differ depending on what your individual retirement goals are.
2. Having No Clue How Much You Might Spend in Retirement
If a giant number does more to stress you out than get you saving, start smaller. Ask yourself, what might your budget in retirement look like? You probably won’t know the answer to that unless you’re currently keeping a budget. After all, if you don’t know where your money goes today, you may be even more clueless about where it could go in the future.
It’s a good idea even prior to retirement to keep a log of spending. This could be anything from dining, groceries, utilities, clothing, car maintenance and fuel, entertainment, your children’s needs, medical bills, travel, your mortgage—the more you can keep track of, the better. Then go through that list and try to predict which of those costs might increase and decrease in retirement. The sum of these costs can help give you an idea of how much you’ll be spending in the future.
3. Underestimating the Cost of Health Care
Speaking of your retirement budget, here’s one cost where many people tend to keep their head in the sand: health care. Most dental care costs and eye examinations, for example, are not covered by insurance. So it is important to have a healthy fund for medical expenses.
4. Responding Rashly to Market Volatility
When the economic weather grows stormy, it may seem natural to distrust the markets. The mistake people make is to convert some of their stock to cash during a crisis. But cash doesn’t provide any growth. Many people sell their stock after a crash and guarantee losses by never getting back in the market to enjoy the gains—they bought high and sold low.
One of the best protections against market volatility is diversification—making sure you don’t hold all your investment eggs in one basket.
5. Not Being Truly Diversified
Most people can recite with ease the three basic asset classes within a retirement portfolio: stocks, bonds, cash. But they may either ignore the need to further diversify within the stock and bond categories—or may not even realize what it means to be truly diversified beyond those basic building blocks.
You may have stocks spanning a variety of sectors—technology, health care and financial services, for instance—but if all those crash, you’re not as diversified as you think. If you’re not sure how to allocate your portfolio, talking to a financial planner can help.