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These 5 Mistakes Will Hurt Your Retirement Plans
Saving for retirement is really important. Unfortunately, too many people do not save enough to live the life they want during retirement. They might even outlive their money or have to go back to work even when they don't want to. Here are 5 common mistakes people make when they are saving for retirement.
1) Putting too much into savings accounts
If you are putting the bulk of your money into savings accounts, then you are missing out on the benefits of compound interest. Savings accounts don't even pay enough to keep your money current with inflation. Instead, put your money into investments with higher interest yields and watch your money exponentially grow from compound interest. What investment options you should take depends on your situation, but if you are risk averse and prefer savings accounts because they are low risk, then consider certificate of deposits and money market mutual funds. Both of these options are incredibly safe but give much better returns than a savings account.
2) Investing too heavily in one place
No matter how lucrative that one investment or industry seems, it can crash. Even "safe" investments, like in real estate can cause huge losses when it crashes. Diversifying your money in many types of investments will minimize the impact you will feel if one company or industry goes under. You should have a variety of investments, including mutual funds, money market funds, and bonds, to keep yourself from getting hurt by changes in the stock market.
3) Not Following the Richest Man in Babylon Strategy
While saving money for retirement haphazardly gives you a little bit of savings, it will probably not amount to much, even if you are putting that money in high-yield investments. Instead, start regularly saving your money. No matter what your income level or job type is, you can follow the Richest Man in Babylon Strategy. This strategy comes from a collection of short stories meant to teach people smart financial habits. The collection is called The Richest Man in Babylon. Even though these stories are old, the wisdom in them can still be used today. According to the Richest Man in Babylon strategy, put ten percent of every paycheck towards retirement and twenty percent towards debt payments until your debt is paid off. After you are debt free, put thirty percent of every paycheck towards retirement. If you are used to using your full paycheck in your everyday spending, then this will be a big change, but following this strategy will make you financially secure when you retire, so you do not have to spend your retirement penny-pinching.
4) Only Making Minimum Payments on Debt
Even if you are only making minimum payments on debt so you can put more money in retirement, this is a big mistake. The interest rates on your debt will add up. When the interest starts gaining interest, you are in trouble. You can end up paying more than twice what the original loan was for thanks to compound interest on your debt. By paying your debt off faster, you will save more money in the long-run. Follow the Richest Man in Babylon strategy to help pay off your debts faster while still saving for retirement.
5) Investing Outside of Tax-Sheltered Accounts
Be careful of putting too much money outside tax-sheltered accounts like IRAs. You will end up paying much more in taxes, which will come out of your retirement savings. Using retirement accounts will let your money grow in peace. You will not get taxed on it until you start withdrawing it from your account and by that point it will have grown a lot thanks to compound interest.