As higher inflation causes everything from food to cars to be more expensive, saving money has become difficult for many. A recent survey by GOBankingRates found that nearly 40% of all Americans want to learn more about savings so they can feel more comfortable with their finances.
According to a 2022 Gallop Survey, Americans are retiring later in life, mostly because they don’t feel they’re prepared enough financially. So how can you make sure you’re saving a large enough nest egg to feel comfortable at retirement? You avoid making these six simple mistakes.
You’re Spending Too Much
The biggest thing that keeps people from reaching their financial goals is not understanding how much they can comfortably spend each month. An OppLoans survey showed that 73% of Americans don’t have a budget that they regularly follow.
Budgeting is one of the easiest ways to understand your finances and how much you spend each month. Plus, with so many tools like Empower or Mint.com, budgeting has never been easier. Simply connect your financial accounts and you’ll be able to see where your money is going each month. This information can then be used to make smart decisions on how much you can spend so you’re still saving enough for the future.
“Despite popular belief, a budget is not intended to be a restricting and static tool, but rather a tool that tells your money where to go on a monthly basis,” said Russell E. Gaiser III, MBA, CPFA, a New York financial advisor. “It essentially gives you permission to spend.”
Not Utilizing an Employer-Sponsored Retirement Account
If your employer offers a 401(k) as part of its benefits package, this is one of the easiest ways to save money for retirement. Plus, if it offers a company match, this is free money you should always take advantage of.
Many employer-sponsored plans are pretax plans which means you won’t pay taxes on the amount you invest or the gains until you retire and start withdrawing the money. However, some companies are beginning to offer a Roth 401(k) which is taxed upfront and tax-free at withdrawal.
Taking Early Withdrawals (or Loans) From Your Retirement Accounts
One of the easiest ways to hurt your nest egg is by taking an early withdrawal or a loan from your retirement accounts. If you withdraw money before age 59 ½, not only are you going to pay taxes on the withdrawal, but you’ll also pay a 10% penalty. Plus, the biggest issue you’ll face will be the loss of compounding returns. Every dollar taken out today means you’ll have less at retirement.
Not Planning for Major Expenses
According to a CNBC Your Money Financial Confidence survey, 53% of Americans have no emergency savings. This can spell trouble if large expenses like a car repair or major medical bill pop up. You could find yourself using your credit card to cover the expense which would reduce the amount you have available to save.
Most financial experts recommend having at least three to six months’ worth of expenses saved. This would allow you to cover any unforeseen expenses and not need to tap into other savings.
Neglecting Automatic Savings
One of the easiest ways to save each month is automatically. With apps like Acorns and Digit, saving money has been made easier. “Many people neglect to set up automated systems for saving. They may plan to save whatever is left at the end of the month but often find that there’s nothing left to save,” said Doug Carey, president of WealthTrace, a financial planning and retirement planning software company.
Carey went on to say, “When you set up automatic transfers or deductions from your paycheck to a savings account, you ensure that a predetermined amount is saved regularly without requiring any manual effort. Consistency is key to building savings over time, as it eliminates the risk of forgetting or neglecting to save on a regular basis.”
Forgetting Your Required Minimum Distributions (RMD)
Once you’ve actually reached retirement age, your nest egg can take a big hit if you forget to take your RMD in a given year. We all want to make sure we’re saving enough for retirement but at a certain point, you’re going to be required to start withdrawing the funds.
Once you reach 70 ½, you’ll be required to start taking withdrawals from any pretax retirement accounts. If you fail to take the RMD in a given year, not only will you be paying income taxes, but you’ll be charged a 50% excise penalty as well.
If you’re not saving enough money each month and you’re worried that your nest egg isn’t going to be large enough when you need it most, there are things you can do. It starts by making sure you’re not spending too much money each month and that you’re maximizing the retirement benefits through your employer.
