The outlook for retirement in the U.S. is pretty grim. Pensions have disappeared for most people, and those that still exist are often severely underfunded. Our savings rate is dismal. The Social Security trust fund is shrinking. Health care costs for retirees are staggering. All in all, things aren’t looking good.
You can blame America’s retirement crisis on a lot of things, from companies that shifted the burden of saving onto employees, to shrinking salaries and an increased cost of living that makes it hard to save, to the 2008 financial crisis, which decimated portfolios and left many people nervous about investing in the stock market. The average person who’s trying to accumulate a retirement nest egg faces some pretty serious obstacles.
Yet we can’t lay all the responsibility for America’s retirement problems on big business, government, and the economy. Sometimes, we manage to screw up our chances of a secure retirement all on our own. Saving for retirement is hard enough as it is. When you make these big mistakes, it becomes nearly impossible.
1. Cashing out your retirement accounts
When you leave a job, you usually have a choice between cashing out your retirement savings, leaving them where they are, or rolling over the money to a new account. Don’t pick the first option. Cash-outs are the biggest source of “leakage” in retirement plans, says the Center for Retirement Research, and when combined with hardship and other withdrawals, can reduce your savings at retirement by 25%.
Most early withdrawals from a retirement plan come with a 10% penalty. You’ll also have to pay tax on the distribution. Yet those penalties pale in comparison to the consequences of losing ground on retirement saving. A 30-year-old who takes $16,000 from their 401(k) could end up with $471 less per month in retirement, reports Bloomberg.
2. Borrowing from your savings
Once upon a time, people used to borrow against their home equity when they needed a quick, cheap source of cash. But that’s become more difficult since the housing and financial crisis, which has some people turning to their 401(k) instead.
Borrowing from your 401(k) is appealing — you can usually get a low-interest loan without having to go the trouble of getting credit through a bank or other lender. But these loans come with some big risks. You’ll lose out on investment returns, incur fees, and will likely not be contributing as much to your savings as you pay back the loan, explained financial adviser Ric Edelman in an article for CNBC. Plus, if you and your employer part ways, you may have to pay back the balance on the loan immediately. Cutting 401(k) contributions as you pay back your loan can also lead to thousands of dollars less in income in retirement, according to Fidelity Investments.
3. Believing you can catch up later
You know the story of the tortoise and the hare. The tortoise challenges the hare to a race. Mid-way through the race, the speedy hare, who’s confident he’ll come out ahead in the end, takes a nap on the side of the road. The tortoise makes slow and steady progress and ends up winning the contest.
The retirement lesson? Don’t be the hare. It’s tempting to take a break from saving, especially when other financial obligations arise. You may think that you can simply make up the difference down the road, especially if you’re counting on a big raise or promotion. But making up for those lost years is not always easy. Your investments will have less time to grow, for one. Plus, you never know what’s going to happen in the future. A job loss or health crisis could make saving difficult, if not impossible. Save while you can. Your future self will thank you.
4. Being afraid of the market
Sticking your money under your mattress – or in a low-interest savings account or CD – probably isn’t going to cut it when it comes to accumulating the nest egg you need for your retirement. Inflation will eat away at the value of your money, and the small amount of interest you’re earning won’t make up for the loss. Instead, you need to put your money to work for you, investing it so that you have the potential to earn a higher return.
Unfortunately, many people, including large numbers of millennials, are wary of investing in the market. Forty percent of young people have a major portion of their portfolio in cash, according to a CNN report. That’s an allocation more appropriate to a current retiree than someone entering their peak earning years. Given their current savings rates and anticipated returns, some millennials won’t be able to retire until they’re 104, says Suzanne Duncan, the global head of research at State Street’s Center for Applied Research.
You put off saving for retirement at your own peril. Wait until age 40 to open a 401(k), rather than starting to save at 30, and you’ve lost out on a decade of contributions and investment growth. Even delaying saving by just a couple of years could mean $20,000 less in annual income in retirement, says MassMutual Financial Group.
Procrastination costs you in other ways, too. Dawdlers are not only less likely to enroll in their employer’s retirement savings plan, but they also tend to save less and are more likely to stick with the default savings percentage, rather than deciding on a retirement contribution rate that was more specific to their needs, according to a study presented at the Joint Meeting of the Retirement Research Consortium in 2014.