There's no single correct way to save for retirement, but there are plenty of mistakes that could be costly. Some of those mistakes are tough to spot, and they might even seem harmless at first. Over time, though, they could amount to tens of thousands of dollars, or even hundreds of thousands, in missed potential earnings.
One of the most common retirement planning pitfalls is especially dangerous, but the good news is that there's a simple way to avoid it.
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Have you started saving yet?
Many U.S. adults are putting off saving for retirement. In fact, around 42% of workers say they prefer not to think about saving until they get closer to retirement, according to a 2019 survey from the Transamerica Center for Retirement Studies.
While that may seem innocent enough (especially if you have other financial obligations that are more time-sensitive), waiting too long to save could cost you more than you might think over the long haul.
Compound earnings are responsible for helping your savings grow over time. The more time you have to save, the faster your money will grow. If you wait too long to start saving, it will be exponentially more difficult to reach your goals.
For example, say you have a goal of saving $500,000 by age 65. Assuming you're earning a modest 8% average annual return on your investments, here's how much you would need to invest each month depending on the age you began saving:
| Age You Began Investing | Amount Invested per Month | Total Savings by Age 65 |
|---|---|---|
| 20 | $110 | $510,000 |
| 25 | $165 | $513,000 |
| 30 | $250 | $517,000 |
| 35 | $375 | $510,000 |
| 40 | $575 | $504,000 |
| 45 | $925 | $508,000 |
Data source: Author's calculations via Investor.gov.
Every single year counts when saving for retirement, and putting it off by even five years could mean having to invest hundreds more per month to achieve your goals.
What if you can't afford to invest right now?
Money is tight for millions of workers at the moment. With inflation still stubbornly high and many Americans facing a cost-of-living crisis, it's understandable if you're putting off retirement planning to focus on other financial goals.
In some cases, that might be unavoidable. If you're already stretching every penny and are saddled with student loans or high-interest credit card debt, for example, sometimes you have no choice but to press the pause button on saving for retirement.
However, if you have even a few dollars per week to invest, that money can go a long way. No amount is too small to save. After all, you can always increase your saving rate later, but you can't get this valuable time back.
A simple trick to help boost your savings
If you do have some spare cash to save, it might be worthwhile setting up automatic contributions, with which you're transferring a set amount of money to your retirement fund on a regular schedule.
When you don't have to think about saving each month, it becomes easier to build it into your budget. Then over time, as your budget allows, you can gradually increase the amount you're saving.
If you're investing through a 401(k), you might be able to set up automatic transfers from each paycheck directly to your retirement account. When that money never even hits your bank, it's less tempting to spend it before you can save it.
With an IRA, you might be able to automatically transfer a set amount from your bank to your retirement account on the schedule of your choice. Again, even if it's only a few dollars per week, that's always better than nothing.
It's not easy to save for retirement, especially if your finances are already stretched thin. But getting started now will save you loads of trouble down the road -- and make it much more likely that you'll reach your retirement goals.
