When it comes to saving for retirement, most people are not coming close to saving as much as they should. According to a recent survey from Fidelity, the millennials, who are the furthest away from retirement, are falling significantly short in saving.
Fifty one percent of millennials polled said they are saving less than 6% of their salary, despite the conventional wisdom that says you should save at least 10% (source). Worse still, according to Hartford Funds research, after growing up during the financial crisis, millennials are reluctant to invest in the stock market and are generally investing as conservatively as 75 year-olds.
Mistakes made in youth can significantly impact their future. Here's how millennials can ruin their retirement.
Start saving early
Half of Millennials haven't figured out how much money they will need to retire and nearly one quarter feel they are too young to worry about saving retirement, according to Tracy Shaw, assistant vice president of business market development at MassMutual. While it may seem too early to start saving, or difficult to find room in a budget, saving early even if that means contributing a small amount, will set the foundation and prevent having to make lifestyle changes later in life,says Shaw.
The moral of this story, save early and often. The longer you delay saving for retirement the smaller your nest egg will be,says Rakesh Gupta, a professor at Adelphi University.
Not developing a plan
Though retirement seems light years away, the sooner you begin visualizing what would be ideal, the better. But dreams are just dreams. Plan how you will get there. Research what financial instruments would support your plan. Stock, bonds, annuities, art, real estate and business are among the many investments that you can make, says Debra Speyer, an estate planning attorney.
It's not enough to make a plan. Exercise the discipline to follow the plan, she adds. A plan without action is pointless.
Forget the mac mansion and fancy car
In pursuit of the American Dream, far too many people stretch themselves financially to get into a house and the results are often disastrous, says Scott Halliwell, a certified financial planner with USAA.
Mortgage payments that are too big, combined with savings account balances that are too low, often lead to higher levels of consumer debt and less money being put away for retirement.
"Get a solid emergency fund in place, a solid budget in place, start saving 10-15% of your pay for retirement, then figure out how to get in a home that you can afford. This way, becoming 'house poor' won't interfere with becoming 'retirement ready',says Halliwell.
It's a mistake too, to go for that dream car early in life, when you're already saddled with student loan and credit card debt, not to mention that you haven't landed that "big job" you thought, given the economy. In addition to the car payment itself taking away from your ability to save fore retirement, jumping on the consumerism bandwagon is often a gateway to making other poor financial decisions, says Halliwell.
Deal swiftly with student loans
Federal student loan debt crossed the milestone of $1 trillion last year. Student loans are a necessary evil for many people, but having to make huge student loan payments for a decade or more after graduation takes away money that could be saved for retirement. By the time the loans are paid off and the money is freed up for other purposes like retirement savings, the typical student loan-burdened Millennial is likely to be behind where they should be, says Halliwell.
"Be thoughtful about how much student loan debt you incur and understand that finding yourself at the bottom of a giant pit of debt you've got to climb out of is a terrible way to start adult life, says Halliwell. Aim to be able to start saving for retirement as soon as you get that first paycheck.
Put the plastic away
It's not just student loan debt that is weighing down Millennials. Fifty one percent of Millennials have credit card debt, with the average amount of debt being near $4,500, according to Shaw. "Even though it may seem tempting to pay the minimum amount on a credit card or other high interest account, doing so will only prolong the debt, says Shaw.
Consider the interest rate and payoff time when handing over a credit card for a purchase or making a payment on an account.
Expect the unexpected
Just like you need to save money for emergencies, realize that one day you might be disabled such that you can't work. If you're not prepared and you suffer a long period of disability that could impact your ability to save for retirement. Disability insurance plays a key role in protecting your income should you become too sick or injured to work.
However, according to MassMutual, only 28% of Millennials have disability insurance. Disability insurance covers the basics like you mortgage or rent, credit card payments, for example. You may be young and invincible but tomorrow comes and who knows what it may bring.