Planning for retirement is easy in theory but difficult for many Americans to achieve. Without dedication – and automation – it can be difficult to live under your budget and set aside the required amount each month to ensure a good retirement nest egg.
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Important: 5 things you need to do when your savings hit $50,000
But even if you’re a committed saver and investor, you can make mistakes that could undo your years of hard work and planning. Here is a list of some common retirement planning mistakes that could derail your long-term savings plan.
start too late
There’s no greater advantage when it comes to building a big nest egg than the compounding power of money. The longer your money is invested, the more compounding can work its magic. But if you start too late, you greatly diminish the effect that compounding can have.
Here is a simple example to highlight this difference in black and white. Imagine you start putting aside $500 a month at an interest rate of 8%. With these parameters, after 40 years of savings, you could have a nest egg of around $1.745 million. However, if you save for just 20 years, your savings won’t just be cut in half – they’ll drop to around $294,510, for a whopping reduction of around 83%.
Even if you save for 30 years instead of 40, your account balance will only reach about $745,000, less than half of what you could earn with just 10 more years of savings. So the earlier you start, the better.
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Not taking advantage of free money
One of the best tools you can use to reach your retirement savings goal is employer matching on your 401(k) contributions. Most large companies will contribute 50-100% of a certain amount you put into your 401(k) account, and over time that can add up to a lot of money.
Considering it’s essentially “free money,” it’s beneficial to maximize your 401(k) contributions at least to the point that you’re earning all of your employer.
Premature withdrawal of retirement funds
If you’re in dire financial straits, it may be tempting to withdraw money from your retirement fund prematurely. However, this can be devastating to your long-term savings.
Not only will you pay taxes and a 10% early withdrawal penalty on funds you withdraw from your IRA or 401(k) before age 59½, but you’re also statistically less likely to return that money. at a later date. This combination of factors can be financially crippling.
Put all your eggs in one basket
Not diversifying your retirement investments significantly increases the risk to your portfolio. Imagine a scenario in which you work hard and save diligently for 40 years, but put all your money into a stock that fails. Not only will you have worked your whole life for nothing, but you probably won’t be able to retire without continuing to work.
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This article originally appeared on GOBankingRates.com: Retirement planning mistakes that will haunt you for years