For most young earners, retirement is probably the last thing on their minds. However, with American savings expectations for a comfortable retirement reaching $1.04 million in 2021, a 10% increase from 2020, the sooner you start planning for your retirement, the better.
While it is necessary to start planning for your retirement early, you need to avoid the mistakes that would cause more harm than good in the long run. The good news is, with the right information and knowledge, you can sidestep the most common financial mistakes people make when investing for comfortable golden years.
Here’s what you need to stir clear off to secure your retirement.
1. Starting To Save Later
For comfortable golden years, you need a decent long-term corpus. However, you won’t be able to build one without a good head start. It’s simple mathematics.
If you start saving early, you will need to put aside much less amount. Plus, you would be able to invest in low-risk investment options and still have enough saved for a comfortable retirement. That’s how compounding interest works.
But, if you start saving at a later age, the amount you will need to put aside would be much more. Plus, as time is no longer on your side, you will be forced to invest in high-yield and high-risk investment options. Should things go south, you could risk losing your hard-earned money. And, you will have no time to recover your investment.
2. Relying On One Investment Option
Never put all your eggs in one basket.
That’s the cardinal rule for all investors, especially beginners.
If the market takes a hit or your asset underperforms, you risk losing all your money. And, starting from the ground up, in your forties or fifties, won’t be so easy.
To safeguard your investments as much as possible, you will need to build a diverse portfolio.
Here’s how you can do it.
- Divide your investments into different financial assets such as 401K, stocks, real estate, commodities, bonds, and employer-sponsored retirement plans, among others.
- Invest in different avenues within the same investment assets. For example, if you want to invest in mutual funds, try putting your money into various funds or funds from different companies or banks.
- Make sure to consider the risk tolerance of each asset before investing. Try to understand how much money you stand to lose if the investment fails. Ask yourself, are you willing to lose that kind of money?
If you are unsure about where and how to invest, seek financial advising from an experienced professional. They can help you plan your entire investment portfolio from the get-go.
3. Failure To Plan for Recessions
The best investment returns tend to show up when you least expect them. In other words, you better be prepared to endure a few losses when the recession hits or the market takes a downturn. And despite a sound investment plan and a diverse portfolio, you will incur a few setbacks along the way.
So, it is best to have a plan in place from the start. Investing in low-risk mutual funds or ETFs can be an excellent way to provide a cushion during recessions. Besides, retirement investment assets often have a long-time frame and better tax-sheltering. If you want to rip the rewards, you have to let your investments ride out.
Don’t panic and pull out your investment after seeing a few losses. Give it time. But then again, consult a professional investment advisor if required.
4. Falling For Impulsive Investment Decisions
Disciplined investment is the key to successful retirement planning. Unfortunately, many investors, especially at a young age, are sensitive to impulsive investment decisions. People often fall prey to investment assets with extremely high yields and little to no added risk.
The FBI also states that potential investment fraud often promises low- or no-risk investments, guaranteed returns, overly-consistent returns, complex strategies, or unregistered securities. Truth be told, the risk to reward ratio for such investments hardly exists.
These investments are often pyramid schemes or Ponzi schemes, where your investment could disappear overnight. It’s best to stay clear of such investment options. If you do want to invest, talk to a professional investment consultant first.
5. Paying Off Low Interest Debt Too Early
We understand the appeal of living in a mortgage-free home. However, paying off low-interest debts like a Mortgage could be a mistake. Instead of using your savings to pay off this debt early, you can invest the same money and get higher returns.
However, credit cards and similar high-interest debts are a whole different story. They often drag down your retirement investment plan. This debt will also affect your ability to outsmart inflation to a great extent.
So, keep two things in mind:
- Pay off all your high-interest debts as soon as possible.
- Never take on additional debt without considering its implications on your retirement plan.
Wrapping Up
As a young adult, you may not be keen on saving for your retirement. However, it’s necessary to start saving for your golden years from an early age. Thanks to compound interest, even a small investment will grow into a sizeable nest egg over time if you start (investing) early. This is a less cumbersome and more lucrative way to build wealth for your retirement.
Just make sure to avoid these five mistakes when planning for your retirement. And, of course, seek advice from pros whenever needed.
