There are lots of ways to sabotage your financial future, but there are nine big ones to avoid. Choosing not to make these financial mistakes will definitely help you improve your financial life when you’re older and no longer in the workforce.
Mistake #1: Maintaining a lifestyle today that requires debt. Thinking it’s OK to always have a vehicle note or lease payment is a self-imposed tax on your future. All the interest paid could be saved and invested for your future. Additionally, borrowing for big ticket items (new furniture, a new roof, vacations, etc.) is a poor decision you’ll probably regret when you’re old. All of these credit-purchases are surefire ways to be less wealthy in retirement and possibly feeling (or being) poor compared to those who saved, paid cash for things they wanted or needed during their working years.
Mistake #2: Only saving enough to get the free 401k match in your workplace plan. Many workers only save what they know they can get matched from their employer, and it’s usually not enough to fund a comfortable retirement, especially when taking future taxation into consideration. A good rule of thumb is to save at least 15% of your total household take home pay PLUS the employer match offered to you. Remember, no old person has ever uttered, “I invested too much money for my retirement.” No. One. EVER.
Mistake #3: Not taking advantage of your 401k Roth option. While you can’t deduct Roth 401k contributions from your taxes now, that’s no reason to ignore this amazing and tax efficient investment vehicle! Are taxes going to go up in the future? I’m betting they will go up… and they may go up a LOT. So why not pay the taxes today and set yourself up to have a nice big bucket of tax-free money in retirement for spending or gifting?
Mistake #4: Buying newer vehicles too frequently. Many Americans trade their vehicles (and borrow to do it) with no consideration for their financial future. Driving a paid-off vehicle until you wear it out and then paying cash up front for the next one won’t make your neighbors and co-workers envious. However, they sure will be envious of you in retirement if they’re driving newer cars all the time now. Maintain your vehicle and drive it until the repair costs are far greater than the value of the vehicle. Save money toward the next vehicle to pay cash for it, and buy another second-hand vehicle and drive and maintain that for a long time.
Mistake #5: Gambling with money that should be prudently invested. Invest your future retirement money in a fully-diversified portfolio and do yourself a favor: ignore your peers who brag about how much money they have made in the last few weeks in a trendy so-called investment. They may not have anything to brag about in a month or two! Diversify your retirement accounts with lots of good quality companies and funds in numerous sectors. Avoid holding too much of your own company stock if you work for a big company that gives it as a bonus. Portfolio diversification softens the blow when the markets get choppy and is what the savvy investors always do.
Mistake #6: Thinking Social Security will be enough. Think again. Even if the government keeps it fully funded (some have doubts they can or will do this) it’s called a supplement for a reason. It’s there to supplement what you’ve saved and invested for decades, not replace it. Oddly enough, everyone knows this but their spending and lack of saving and investing prove they know one thing and choose to do another.
Mistake #7: Assuming you are investing enough. If you’ve not done conservative long-range projections on your savings rate, investment returns, inflation, taxes, healthcare, and long-term care costs for retirement, you may run out of money when it’s too late to do anything about it. There are decent online tools to accomplish this, but working with a financial planner (not just a broker or investment manager) will pay off in the long run with good advice from someone who thinks about and helps you plan for many scenarios down the road.
Mistake #8: Assuming you can work longer if you haven’t saved enough. A recent study published by the Federal Reserve revealed that 30% of Americans retire due to health-related issues.* Lots of uninformed people say, “I’ll just keep working if I don’t save and invest enough.” Don’t remain ignorant of the possibility you may not be able to work as long as you like. Bad things happen to good people. Hope for the best and prepare for the worst, just in case.
Mistake #9: Not being debt-free by your retirement target date. If you think it’s stressful to carry debt when you’re earning a regular paycheck, can you imagine the stress it might cause if you have a mortgage payment and car payment on a fixed income as you age? Get out of debt (including your mortgage) as soon as possible so you can invest your money and make some amazing plans for your future.
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*The Fed – Publications: Economic Well-Being of U.S. Households (SHED) (federalreserve.gov)