On the road to retirement, countless seniors encounter their share of hiccups. So if you're still relatively young and have many working years ahead of you, it pays to learn from others' mistakes to avoid falling victim to them yourself. Here are just a few blunders that tend to plague retirees -- and how to dodge them.
1. Not saving sooner
It's estimated that more than 40% of Gen Xers and baby boomers -- workers in their late 30s all the way through to their early 70s -- have no retirement savings. At all. And that's a frightening prospect when you consider how little time some of these same workers have to catch up.
IMAGE SOURCE: GETTY IMAGES.
The problem with delaying your retirement savings efforts is that you limit your ability to benefit from the power of compounding. See, when you start saving early on, you get to invest your savings so that it grows over time. But the shorter an investment window you give yourself, the less growth you'll achieve. The following table further illustrates this point:
| 25 | $2.3 million |
| 30 | $1.6 million |
| 35 | $1 million |
| 40 | $680,000 |
| 45 | $439,000 |
| 50 | $275,000 |
| 55 | $163,000 |
Data source: author.
Keep in mind that in the first scenario, you're coming away with $2.3 million by putting in just $270,000 of your own money over a 45-year period. But it's that sizable window that allows for what's basically a $2 million gain. As we work our way down the table, however, we can see that those gains get smaller and smaller, until they're far less impressive. Case in point: If you wait until age 55 to start saving, you'll have a modest $73,000 gain over a 15-year period. Is that better than nothing? Sure. But it's nowhere close to the $2 million we just saw.
The takeaway? Don't wait to start setting funds aside for the future. Currently, you can contribute up to $18,500 a year to a 401(k) and $5,500 a year to an IRA if you're under 50. If you're 50 or older, these limits increase to $24,500 and $6,500, respectively. Even if you can't max out your contributions, do your best -- and the sooner, the better.
2. Investing too conservatively
In our example, we saw how monthly contributions of $500 could grow into a much larger sum over time. But those calculations factored in an average yearly 8% return, which we need to talk about for a minute.
That 8% benchmark is actually quite doable if you load up on stocks in your portfolio, which anyone who's at least seven years away from retirement would be wise to do. Go heavy on stocks, and you're likely to see that average annual 8% return even if the market takes multiple dips over your investment window (keeping in mind that 8% is a bit below the market's historical average). On the other hand, if you stay away from stocks for fear of losing money, you're going to come out with a lot less wealth.