Not saving enough money for retirement can hurt you as you grow old. While results may not always be disastrous, they may have an adverse effect as you age. An example you might have come across could be an elderly neighbor having to work part-time, or an acquaintance who had to move in with their adult children since they didn’t have enough money to survive on their own.
Let’s look at potential reasons as to why you’re not saving for retirement and what to do about it.
1. It’s Difficult to Make a Change and is Much Easier to Do Nothing
When it comes to retirement, you may be daunted by thinking about the kind of investment and retirement accounts to open and the disparate rules for each investment vehicle. For example, you can contribute a maximum of $6,000 annually to a Roth IRA or an IRA if you are less than 50 years old. On the other hand, you are not eligible to contribute to a Roth IRA if you earn more than $140,000 annually. Furthermore, if you make an effort to nail down the specifics when it’s time actually to open an account, you may falter.
This results from the status quo bias that perfectly describes a person’s tendencies to find it challenging to make a change. To get around this possibility, you should consider consulting an experienced financial advisor like Ridgewood Investments to guide you to save enough money in your retired years.
2. People Don’t Make Decisions Keeping Their Future in Mind
According to the Center of Retirement Research at Boston College, the average American will retire when they are 64 years old. If you’re in your 30s, retirement is likely to be about 30 years in the future. On the other hand, if you’re in your 20’s you’re not expecting to retire for another 40 years or more. As a result, it’s easy to think that retirement is far in the future and that you have plenty of time to save for it. You may tend to treat yourself to something you will enjoy now rather than saving money for your old age. Such a thought process is known as hyperbolic discounting. One way to get around this is to create a budget to figure out how much you need to save for your retirement.
3) You May Underestimate the Time Period for You to Achieve Your Desired Savings
People suffer from planning fallacies when it comes to their finances. You may underestimate the time it takes to complete a task (or in this case, achieving a savings target) despite knowing from experience that you always take longer to get something done than intended. As a result, you may put off saving for your retirement until your 30s or even your 40s, assuming that you’ll be able to achieve your desired savings in a couple of decades.
To get around this, you need to know how to save effectively for retirement. The first golden rule is to save often and save early. Furthermore, you should diversify your investments, pay yourself first (i.e., invest a certain amount each month) before enjoying the rest of your monthly paycheck, and use dollar-cost averaging when it comes to investing in stocks.
4) Make Smart Investment Decisions
When it comes to investing for the long run, you shouldn’t get fancy. Just cut to the chase by using a simple formula. Think simple, boring, and cheap investments. At the same time, some people may be experts in stock picking or selecting mutual funds that do better than the market. You can’t know whether they’ll be able to do so in the future. The best bet is for you to buy an index fund and keep it for the long term.
The advantage you get is that you’ll capture the long-term returns at a lower cost than going with actively managed mutual funds or portfolio managers. Also, when it comes to retirement savings, you should touch your investments as little as possible. Furthermore, since an Index fund will invest in multiple stocks, you won’t see massive day-to-day swings of the kind that may happen in individual stocks.